Becoming a successful trader means learning and mastering many different aspects and especially different strategies. One of the biggest decisions that you will need to make right at the start is choosing whether you wish to dedicate your time and efforts to short-term trading (day trading), or long-term investing.
Both are perfectly capable of bringing you good amounts of money, provided that you know what you are doing, of course. There are also many traders that choose to do both simultaneously. However, if you would like to focus only on one of these, at least at the start, you should consider both and then make your choice.
Day trading vs. long-term investing
As you may know, day trading involves those trades that are completed in a single day. Traders who choose this approach trade by taking advantage of short-term fluctuations in the assets' prices. These trades can often last only for a few minutes, or even seconds. In some cases, they could last longer, but they are always opened and closed within the same day, and never left overnight.
Long-term trading, or investing, consists of trades that stay open for much longer periods. The shortest ones can last for days or weeks. This is also known as swing trading, and it is something of a middle ground between short-term and long-term trading, while the real long-term investments could last for months, or even years.
Unlike short-term trades, which use the buy-and-sell approach, long-term ones involve a buy-and-hold approach. While this may seem simple enough at first, it is worth noting that there is a rather different decision-making process for each of the two. It also requires different skills and even personality traits.
Other differences between the two include:
- • Capital requirements
- • Skills
- • Personality traits
- • Time commitments
- • Potential returns
Even so, both types of trading represent an important part of a diversified investment strategy. Short-term trades bring smaller profits, although significantly sooner, and they require traders' activity and vigilance, while long-term trades bring more of a passive income and wealth generation.
With that out of the way, let's focus on the mentioned differences between the two types of trading, and see what each of them means, and how it impacts the trader and their approach.
1) Capital requirements
When you enter the world of trading, you have to start with something. Making money is the goal, but you need to have minimal capital with which you will start, and that's where the first major difference between these two approaches lies.
Of course, this will also depend on what you wish to trade, and so for trading things like futures, it would be best to start with $5,000-$7,500. However, to day-trade stocks in a country such as the United States, you will have to maintain an account balance of at least $25,000. There is no official minimum that you need to have for any legal reason, but the best way to start trading currencies is by depositing approximately $1,000.
Your options are a bit more limited if you wish to invest long-term, and most investors typically go for stocks. This is done due to a few practical reasons. For example, futures have an expiry date, which makes them far from ideal for long-term trading. As for currencies, you can invest in them, but the choice is limited here, as well, as there are very few of them that are stable and investable.
Meanwhile, stocks and ETFs that you can choose from are listed in thousands, and they can be easily invested in for years to come if you are patient enough to wait for that long. Once again, the minimum required capital varies depending on your decision, and there is no minimum that you need to invest. Instead of focusing on the amount, you should focus on considering your commissions as carefully as possible, and make sure to educate yourself on the assets you are investing in. If you are a beginner, it is best to use small amounts until you get the hang of things.
2) Time commitments
Another major difference between long-term and short-term trading is, obviously, the amount of time that you need to dedicate to the market. For example, day trading means that you need to open and close a position within a single day, and often within minutes, or even seconds, as mentioned.
That means keeping an eye on the current developments, the market movements, and anything that could bring a change to the prices of assets you are trading. If you wish to earn daily, you also need to commit to following the market daily, which could typically last for a few hours per day.
The largest price movements are typically happening within the first hour after the markets are officially open. The price tends to move for a few hours, but these movements stop as the New York lunchtime approaches. In the end, you should dedicate anywhere from 15 to 40 hours per week in order to be there for every opportunity and make the best of the market situation.
On the other hand, when it comes to long-term trading, it gives you much greater flexibility, as you can do your research at any time and follow the market movements only occasionally. This is a good way to invest if you have a day job at the office and can't afford to constantly monitor the market.
In the end, all you need is a few hours per month to browse the stocks and find the one that meets your criteria, based on the investment strategy that you choose. In extreme cases, if you are one of the so-called 'set and forget' investors, you will need to do only the tiniest bit of research and only check on your investment from time to time, every few months or so.
3) Skills & Personality traits
Skills and personality traits can be combined into a single point, and it is rather easy to understand why this is a major requirement in order to be a successful trader. You will also early understand why the two approaches to trading require different skills and personalities.
Basically, any type of securities trading requires commitment, as you need to do the research, spend time on studying different strategies and picking the right one, and alike. You will also have to learn how to implement the strategy once you choose one and work out the details.
This can be a bit difficult for new traders, at least until they learn the basics and get a hand of it. Another thing that is difficult for new traders to remember is that they must stick to their strategy, and avoid reacting emotionally. Many tend to do just that as the opportunity seems right for the taking, and even though the trigger does not present itself, undisciplined and emotional traders tend to enter or exit the trade and end up losing their investment.
Long-term trading, obviously, requires patience, as you need to wait for years before you can profit from your investment. However, patience is also required for day trading, as you need to wait for the previously established criteria to be met, and not react too soon.
The same is true for long-term investors, as they also need to wait for a trade trigger to present itself before reacting. However, they are not watching their positions constantly and worrying about every penny and every slightest price movement, so the temptation to trade doesn't happen too often for them, although it is still there.
Basically, the biggest requirement is patience and control over your emotions, as you cannot afford to panic or react before the time is right. Keep this in mind, and you will definitely profit much more often than those who forget such rules.
4) Potential returns
Lastly, a lot of traders decide whether they would pursue day trading or long-term investing based on potential returns. Naturally, your goal is to make money, and you will always choose the one that can offer higher potential returns.
However, it is difficult to deduce which one is better, as they are completely different things. Day trading requires a lot of your time, while long-term investing requires barely any of it.
However, you can end up earning millions in long-term investments with little to no impact on performance, while day traders will see a decline or surge in performance even if they have only a few hundred thousand dollars in their account.
Deploying large capital on minutes-long trade is difficult, and all of these differences end up making the two types of trading extremely different.
As a day trader, you may be able to make 0.5% to 3% per day on your capital, and that 3 % of the profit will really only come on the best trading days. While this is quite a small amount per day, on a monthly basis, that represents 10% to 60% of your capital, which is much, much better. However, only smaller accounts can expect returns as high as 60%, and as your capital grows, you will move more and more towards 10%.
Meanwhile, long-term traders can expect to have an average of 10% per year, but this depends on the year, and sometimes, the returns could be much higher or much lower. But, they usually don't have to do anything except for waiting and watching for the market's performance.
Obviously, there is no easy answer here, and you have to make a choice for yourself. As mentioned, you can go for both if you feel like it, or you can try focusing on one, depending on your spare time, personality, and how much effort you wish to invest alongside your money.
Whichever route you choose to take, you should still remember that patience is the key and that allowing your emotions to rule you can only lead to making an error — one which could cost you quite a bit, depending on your investment.
Author: Ali Raza - A journalist, with experience in web journalism and marketing. Ali holds a master's degree in finance and writes extensively about the financial markets and fin-tech industries.