In a sense, trading is the flip side to investing. You invest for months, if not years, and should buy assets that you sincerely believe in. When you invest, you should buy good companies to hold for a long time.
Trading, on the other hand, is about the short term. This is all about speculation. When you make trades, you buy and sell assets because of how the market is moving. This is all about technical indicators, not fundamental strengths, and trying to predict how the market will move.
Tim Collins recently walked Real Money readers through his thinking for a trade on Nikola NKLA as an example. “This is,” he wrote, “only a trade. I don't have any fundamental belief in Nikola right now. Maybe that will change over time but this is simply a trade.”
As he put it: “It's still crazy out there. Lots of squeezing and chasing going on in the market… Making things more fun is the options market available to create stronger momentum. Still, I feel like things are crazy enough that I have to consider a trade on Nikola. I can't think of a more hated name, which makes it the perfect candidate for a run into the teens. Did I mention nearly a third of the shares here are short?”
Collins went on: "The company is still trying to recover from the debacle surrounding its former CEO and the infamous "demonstration" of the Nikola One. The float is large at nearly 200 million shares; however, remember that short count. Currently (as of mid-September), the short ratio is a whopping five. That means it would take five days for shorts to cover, based on average volume and if they were the only buyers.”
This is the kind of environment that a trader loves. The price of this stock is likely to move based on the nature of the market. With a heavy amount of shorted stock, Nikola’s stock price will have to go up at least a little as those traders cover their shorts. This creates a chance to grab a quick profit by taking a long position in advance of those covers.
“The MACD (Moving Average Convergence Divergence) is trending much stronger and we have a bullish flip in the parabolic stop-and-reverse (PSAR). We last saw this before the August run from $9 to $11.50. Huge? No, but definitely respectable. That same level $11.50 would put us at the 50-day simple moving average (SMA).”
“That's my initial target here, but with the big short interest this could have legs to $14-$15. I'm playing it with a simple call buying approach, giving myself a little time and a little intrinsic value.”
Real value? Not necessarily. A chance for a short-term profit? It seems likely. That’s trading in a nutshell.