Why One Should Move from Being an Active Trader to Passive Investor?

Trading makes you feel of being involved in the market action which can be exciting and can pump the adrenal. It gives a sense of achieving success (or failure) whereas investment doesn’t give the same feeling of accomplishment and is often boring with no sense of involvement.

I was a trader for a long time and I learned the process of making money on a consistent basis in the market with active trading with price action. But over time I had to make a move from being an active trader to a passive investor.

Here are few reasons why I had to make a move and unlearn some of the trading ideologies and learn the art of investing.

Trading isn’t Scalable

Trading isn’t scalable will be a general statement but it wasn’t scalable at least for me. In absolute terms, the quantum risk increases considerably as we trade with a large amount.

Let me explain this with an example.

Let us say we have 4L Rs in the trading and each position will be in the range of 1 to 1.5L for me. I normally take up positions 1/3rd to 1/4th of my trading account and underleverage than over levarage. In an open position of 1L and with a stop loss of 4% the amount I am ready to lose in absolute terms is 4k.

The same scenario with 20L Rs in the trading account and the 4% stop loss amount becomes 20k which may not be very high for me and still manageable but with 40L, the stop loss of 40k, though it is still 4% of the total traded value, the amount seems too big to risk.

For some the stop loss amount of 40k may be too big for others it may be either 20k or 80k. In either case, there will be an amount too big to risk.

So you can’t scale up your trading account beyond a point. Which means the positions in the market will have to remain the same size to reduce the stop loss amount in absolute terms. It will result in a reduced ROI and can’t generate incremental returns with an increase in capital.

Not Enough Open Positions

When you cannot take up one big trading position so the other alternative is to take up smaller positions but isn’t very fruitful either.

I couldn’t focus on my open trading positions when they were more than 4 at a single point in time. Even with 4 positions, I was more involved in the market action than I would have liked to. So I preferred to have 1 or 2 open positions because having more open positions meant, my other work lost my focus and concentration.

A full-time trader can have lot more open positions but the point is, there is a limit to the number of open position one can focus on at one single point of time in the market as well.

Mediocre ROI Target

As a trader, you aren’t trying to double or triple your money in a single trade and often the best possible targets are in the range of 20 to 25% with a stop loss being of 4 to 8%.

But as an investor, your viewpoint is to invest for the long-term and double the money. The time to double or triple can vary from investor to investor and from one position to other. Some may not be able to achieve it either but the vision of an investor isn’t to make a profit of 20 to 25% which is the most important aspect.

As an example, I made a profit of 50k in a couple of days which was quite handsome (Details here) but if I had hold-on to my position for one year, my investment would have doubled. How handsome it would be? Lots of ifs and buts but an investment position in my open portfolio where I have doubled my investment in under a year and I am still holding my investment position.

I compared both the positions though they are more than 5 years apart is because the very next day when I took the position, both the stock rallied handsomely. I wasn’t too concerned about booking out of my investment and I wasn’t too eager to keep my trading position open. The only change was my varying viewpoint.

Trading can create income but not wealth

Most passive of traders can have a tough time not to look at the charts of the open positions for weeks. A very active of investor may only need to check once every quarter how the company has performed in the near term and is this something which gives them a level of comfort to hold it till the next quarterly result.

The limitation of trading is, you can create a certain amount of money trading but you can’t create a fortune. I could be completely wrong in making such an assessment but this is what I have made of it being in the market for a decade doing both trading and investing.

As a trader, you are the sole reason for your trading wins and losses. Your money isn’t working for you hard enough though it may seem so. Your money needs your active direction all the time and so it can’t help you achieve financial freedom.

Final Thoughts

My view is, one can start as a trader when they have a limited amount of money to allocate in the market but can devote some time as well. As the money grows, one has to make a move from being an active trader to a passive investor.

If you are already short on time and cannot allocate enough time to market, you shouldn’t be dealing in stocks and go the mutual fund way.