There are three main styles of trading: Day trading, swing trading, and long term investing. It is crucial that before you start trading with real capital to know what style is best for you. You cannot turn a day trade into a long term investment just because you are too stubborn to take a loss. Let’s go into more depth on each style of trading.
Day trading is defined as entering and exiting a position within the market hours of one day. This can mean buying (or shorting) at the opening bell, holding all day, and then closing the position right before 4PM, when the market closes. It can also mean buying a stock and then selling 3 seconds later for a quick scalp.
Day trading allows you to capitalize on profitable short-term movements and setups that are only valid on the intraday time frames, such as the 1-minute and 5-minute charts. Day trading also eliminates the risk of holding a stock overnight . Day traders can capitalize on short-term market movements, and do not have to worry about the overall market conditions as much. This style is a very efficient use of capital because you can rotate your capital into trending stocks and capture multiple high percentage moves in a short period of time.
Some of the disadvantages of this style of trading is that it requires you to be very quick and decisive, which is not suited for everyone’s personality. When you are day trading you are trading volatile stocks they can go against you very quickly. Another downside is the pattern day trader rule, which means you need $25,000 to complete more than 3 day trades per week with a US stock broker.
Swing trading is buying or shorting a stock and then closing the position more than one market day later. Buying a stock right at the close and selling it the next day at the open is technically defined as a swing trade. Swing traders are looking for larger moves in the markets that take longer to fully develop.
An advantage of swing trading is that a single stock can yield substantial returns over the course of several days. Several well timed swing trades can grow a trading account significantly in a short period of time. Unlike day trading, a swing trade doesn’t require precisely timed entries or close intraday monitoring. In general it is a better style of trading for someone who has a full-time job during market hours that is less time consuming and less stressful for the most part.
One of the disadvantages of this strategy is that your capital is tied up for longer periods of time than if you are day trading. This could mean you could miss good opportunities because your capital was stuck in a slower moving stock. You also open yourself up to the risk of holding stocks overnight. There is a chance a stock could open much lower against your position which is known as a gap up or down.
Long Term Investing
This is the most common type of investing for most people. Also referred to as “Buy and Hold” investing, it is the least active style of trading out of all these. You are just buying a stock once and holding for months or years. Very low stress, it can generate a consistent passive income if you are in the right stocks and indexes, and there are plenty of financial intermediaries you can put your funds in to handle all of the work.
However, your funds are illiquid and the returns are much smaller for the short term than if you day trade or swing trade that same amount of capital correctly. If you use a financial intermediary to mange your capital, you’re also usually delegating the responsibility of your returns to someone else. This is the lowest risk style of investing out of all three mentioned, but it is also the lowest reward short term.
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