Investing and trading are two very different activities. When we invest in something, whether property, personal property or some type of security, it is essential that we have a fundamental understanding of the investment. Investments generally take some time before they pay meaningful rewards, and we typically don't monitor their progress (or the lack thereof) on a day-by-day basis.

Because you are reading this article, you probably think of yourself as a trader. As traders, we bring liquidity to markets and assist with the free flow of money within capital markets by taking on risk that others no longer want.

In most cases, we do so for very brief periods of time, ranging from a few minutes to a few hours – occasionally, a few days. We enter and exit these markets based on some sort of technical analysis (usually pattern recognition) that we believe provides us with an edge over a series of trades.

To the extent that we treat trading as a business and methodically execute well researched trading plans (or business plans), our speculating is well controlled, highly professional and usually quite profitable – it is very different from gambling.

As traders, we are not really interested in fundamentals. Bull market, bear market, range-bound market – it makes little difference because within all these markets are small patterns that repeat over and over on an intraday basis. The repetition of these patterns is generally so consistent that having an opinion about what a market will do on any given day (or week) is usually detrimental. This is because our opinion will frequently be at odds with what we know we should do based on our research into the functional analysis or behavior of that particular market.

Despite knowing this, many of us – myself included – can't help but indulge ourselves with the idea of “investing” in some of the markets we trade. It seems reasonable enough; after all, we follow the market all day long. Surely, it would be smart to try to capture some of the big moves we see on these charts.

We could spend some energy trying to differentiate between day trading, swing trading, short-term trading, intermediate term trading, long-term trading and investing. The bottom line, however, is that it is much easier to project what a market will do over the next hour than it is to project what it will do over the course of a day, several days or several weeks.

The fact that this is the case can readily be seen in what it takes to be considered an investment superstar. Consistently, bank returns of 15 percent per annum as a fund manager will likely get you on CNBC.

Professional traders will trade circles around fund managers for the reasons already stated. Nonetheless, most of us want to don our investor caps at least a couple of times a year when we think we have spotted a big opportunity in a market like the S&P.

Certainly, some money can be made in this kind of endeavor; however, you need to watch out for some pitfalls.

The following guidelines may be helpful:

1. It is preferable to do trading and investing from two different accounts. This will help avoid confusion and blurring of the lines.
2. At the very least, use different security instruments. For example, if you day trade the S&P futures, do your investing in the cash index (the exchanged-traded fund, SPY) or SPY puts and calls.
3. Don't use margin until you have some success at this.
4. Follow a written plan for your investing.
5. Always limit your risk by the use of protective stops. I suggest a limit of 2 – 3 percent of your account balance.
6. Hedge your bet. For example, if you believe that the macro-economic picture suggests a pullback in the S&P (and technicals seem to confirm it), you could attempt to cash in on that move by buying some puts in SPY. To protect the value of your investment in those puts, you could buy the 60-minute bullish reversals in the SPY and go flat on the bearish reversals.

These are suggestions for you to consider – they are not investment advice. This kind of approach should protect you from yourself so that you don't find your “investing” fouling up your more lucrative trading.

*Reprinted (and modified) with permission from Kerry Szymanski

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