Pros and Cons of Day Trading Versus Long-Term Investing
Stocks and other assets generate profit in two different ways. While day trading is based on short-term moves, investment schemes may span years. Your choice should be based on a number of factors. Here is a basic comparison to help you distinguish between the strategies. There is no reason not to pursue both.
Definitions and Key Distinctions
Day trading, as the term suggests, involves positions that are opened and closed within the same day. Profit depends on trades lasting minutes or even seconds. This requires close monitoring of the price dynamics.
Investors, on the other hand, hold on to their assets for extended periods. Some even leave them to posterity as an inheritance. Their positions remain open for months or years. Hence, if day trading may be called the buy-and-sell approach, this method qualifies as hold-and-sell.
Other differences include the following:
- capital requirements,
- skills and personality,
- potential profits.
The modes require different decision-making styles. Sometimes, different mindsets overall. The fundamental distinction lies in the duration of open positions. Between these two extremes, there is a middle ground known as swing trading. Here, trades last days or months.
How Much Capital Is Needed?
To be tradeable, brokerage accounts in some countries need a minimum balance of $25,000. This is what day trading generally requires. Currency exchange is an exception. Here, there are no legal restrictions, but $1,000 is a recommended starting point. This is true for the top forex trading platform. Finally, the day trading of futures may commence at $5,000-7,500.
For long-term investors, there is no set minimum. What matters is the commission paid in each specific case. These people operate in the stock market. Both futures and currencies have limitations which may render them unsuitable for the long term view:
- futures have an expiry date,
- a few currencies are stable enough.
Hence, while Forex trading uses currency pairs, investors prefer other tools. These are stocks and ETFs. Both can trade futures and currencies, but indirectly. Contact your local broker for exact terms and conditions in the region.
Con: Time Restrictions
One drawback of day trading is its time restrictions. American and European markets have certain opening and closing times. While the former is most active around 9:30 EST, markets in Europe have their own schedule. If you are based in South America, the best time to trade quickly is in the morning or evening.
Long-term investors have no reason to worry about such limitations. They can buy and sell assets at any time. Unlike day trading, this is ideal for someone who works full-time. All you need is a couple of hours per month. Investors analyze available stocks and choose those which suit their strategy. Here, the most time-consuming task is to generate a strategy in the first place.
Pro: Quick Gains
For quick trades, the daily commitment must span at least a couple of hours every day. This translates into 15-40 hours every week depending on the intensity of trading. Generally, peak activity is observed at the beginning of regular market hours. This is when your odds of profiting from large-scale price swings are the largest. Then, the intensity gradually subsides.
The first two hours are crucial for many day traders. Some of them prepare in the early pre-market hours to evaluate the current situation. The resulting trades should be reviewed twice – daily and weekly.
Pro: Gains on Gains
Average daily gains for quick traders are between 0.5 and 3 percent in the best-case scenario. Over the course of a month, this means 10 to 60 percent of growth. The smaller the account – the larger the figure.
Another advantage is the quick accumulation of gains. For example, a trader who begins with $40,000 and gains a 10% monthly profit, will have $44,000. Another month with the same size of gains leaves them with $48,400. This is how much they can invest. Locking of profits and compounding both occur daily.
As regards investors, they operate within a longer time frame and profits are generated accordingly. On average, stocks bring you 10 percent annually. This takes into account possible higher returns and occasional negative performance. Talented players can boost their profit indicator to 20 percent annually. Compounding does occur, but it is much slower.
The Need for Emotional Discipline
Despite the differences, investing and day trading share one crucial requirement. Stress resistance is vital for any decision-maker in the realm of finance, especially in times of crisis. Make a plan and pursue it.
One needs to work out a suitable strategy and follow it rigorously. Deviations caused by emotional triggers often lead to errors. And errors cause financial loss. Therefore, day traders and investors must both make decisions based on trade triggers only.