Day trading vs long term trading – The Key Considerations

It’s hard to gauge the total value of the world’s financial markets and assets, with the total market capitalisation of global stocks estimated to be in the region $70.75 trillion as of December 2019.

There are many ways in which you can trade different financial markets too, with day trading and long-term trading offering the most obvious examples.

But what do these types of trading entail, and what are the main considerations of each one? Let’s find out.

Day vs. Long-Term Trading

As the name suggests, day-trading involves placing a high volume of orders that may last for seconds or minutes, with a view to capitalising from short-term fluctuations in your target market.

As a result, all day trading positions are opened and closed within the same 24-hour period, with this investment method often seen in the forex market.

The reason for this is simple; as currencies can be traded as derivative assets on the forex market, creating the opportunity to speculate on short-term price shifts, benefit from a market contraction and profit from the inherent volatility that underpins this entity.

Conversely, long-term investment consists of making trades that can remain open for an indefinite period of time, from weeks and months to years in some instances.

Such investments are best known as buy-and-hold trades, and are most commonly seen in stock and commodity markets where investors can access secure stores of wealth such as equities, gold and silver.

The risk level associated with such stocks and products is generally lower than day trading and derivative assets, as you’ll retain ownership of the underlying financial instrument until you choose to sell.

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Pros, Cons and Considerations – What do You Need to Know?

One of the main considerations here is the minimum capital requirements that are in-play, with day-trading generally less accessible and requiring a far higher brokerage balance.

More specifically, day trading stocks in the US will require investors to hold a brokerage account balance of $25,000, although there’s no legal capital requirement to day trade in the currency markets.

The same principle applies in the UK, and in this respect, most investors who want to focus on stocks would be best served by focusing on developing long-term strategies that don’t demand specific capital holding requirements.

However, futures aren’t particularly ideal for investors with a long-term strategy, primarily because they have a fixed expiry date (depending on the type of agreement in place) that instantly compromises any viable buy-and-hold portfolio.

There are also different time commitments associated with these types of investment, with day trading requiring a daily push from investors and incredibly high levels of analysis and planning.

When applying this to the forex market, it’s also important to note that this entity is accessible 24/5, so you’ll have to time your trades effectively and look to capitalise during periods of increased volatility (even accounting for the rise of automated trading).

Conversely, long-term traders can benefit from a less time-sensitive portfolio once they’ve bought their stock, particularly if they intend to hold this for a period of years.

You’ll need to monitor price movements and the trajectory of the asset in question, of course, but this may not be a major issue if you’ve done the requisite planning and analysis upfront.

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