People always want to find the best type of trade to invest in. This particularly holds for short-term and long-term trading. This decision, however, varies from person to person. Ideally, the trader must decide on a trading type that best suits his/her personality. Let us take a closer look at short and long-term trading to gain some insight.
Short-Term Trading: Intraday Profits
When the deal time from buy to sell is limited within a few days or weeks, it is considered as short-term trading. Just like everything, it has pros and cons. Such a trading scheme shows results in a much shorter period. You can earn profits in a so-called intraday term — when the deal closes within a day. If you discover that a wrong decision was taken, you can reinvest the money in some fresh stocks, because the capital is at risk for a shorter period.
When the assets are volatile enough to allow you to gain profit in short-term trades, you have to figure out that it works the other way, too. It is important to react fast, otherwise, you might lose big sums of money. Also, it is time-consuming — a lot of attention is needed to track changes in the market. Thus, your stress level is likely to increase: a lack of control over fluctuating price curves can cause anxiety. However, some traders like this feeling!
Short-term trading is both lucrative and risky. It can last from several minutes to several days. To succeed in this strategy, you need to keep abreast of the current market trends and understand risks and rewards very clearly.
Daily trading is an isolated case of short-term trading. As the name implies, such a trading strategy refers to purchasing and selling a security within a single trading day. While most common in the forex market, it can occur in any other marketplace as well. Day traders are highly educated and well-funded. They use liquid stocks or currencies with especially high leverages to gain profit from small price movements.
Day traders are especially vigilant to events likely to change the evolution of the market. The news-based trading technique is rather popular! Traders watch scheduled announcements such as corporate earnings reports, economic statistics, and interest rates. Market psychology works in a such way that higher volatility emerges when the expectations on the mentioned results are not met or exceeded. The sudden news-driven moves are a great possibility for a careful trader to benefit.
Daily traders use various intraday schemes:
- Scalping. A strategy based on frequent and small-profit trades made with small price changes throughout the day.
- Range trading. This trading plan is built on resistance and support levels to identify the correct buy and sell decisions.
- News-based trading. We have mentioned it above — this strategy is all about searching for trading opportunities around news events.
- High-frequency trading (HFT). This investment strategy uses hi-end algorithms to uncover minor or short-term market flaws, allowing traders to profit.
Long-term trading refers to selling ranges within a few months to several years. It has some advantages for an investor. It is not necessary to trace the graph round the clock, as in the short-term. You can allow yourself to ignore brief trends and focus on future conditions. It saves plenty of time, which you may spend analyzing the market. Thus, it can potentially save money if you study through other ways to invest.
Long-term trading is flexible, allowing compound investing. You can invest the dividends back in the market to earn even more profit. It also demands fewer taxes: most short-term traders need to pay around 20-30%, while long-term investing is charged only at 4-15%.
Consider its drawbacks! As this strategy is stretched in time, it is easy to miss a volatility period to make money. The barrier of entry is rather high as well — you need to have a profound understanding of a sphere you invest in. You cannot make decisions based only on rumors and your intuition. A lasting investment process with a demand of deep knowledge already makes long-term trading a high-key and patience-requiring strategy, not to mention the need to “do your homework”. Indeed, an understanding of the security of your choice should be constantly supported with sound research.
Types of assets
First of all, what is an asset? It is some resource owned by an individual, a corporation, or a government. The mentioned privates and entities obtain assets to gain profit from them in the future. Some assets also may generate cash flow, reduce expenses or increase sales — it is still all about getting financial benefits.
It is unsure how exactly to distinguish types of assets. However, we offer you the following categories:
- Stocks or equities — ownership shares of publicly-traded companies. You can trade them on stock exchanges like the widely-known NYCE or NASDAQ. This type of asset allows gaining profits in two ways: by receiving dividends or through the rise of the share. The securities are often subdivided by their capitalization into small-cap, mid-cap, and large-cap stocks.
- Bonds and other fixed-income investments — investments that return in the form of interest. Such investments are considered less risky than equities and other asset classes.
- Money market funds, cash, and its equivalents — this type of asset is valued by traders for its liquidity. Money or its equivalents can be accessed at any time.
- Tangible assets including real estate — this asset class is reliable against inflation. The tangible form of these assets also makes them perceived as more “real”. Such a sound nature gives it the advantage of other assets existing only in the form of financial instruments.
- Forex, futures, options, and other derivatives. Derivatives are instruments that are derived from an underlying asset. For instance, stock options are derived from stocks.
How to trade with less risk?
Both experienced and novice investors need to manage their risks. In trading, the rule of the thumb is: your risk is the same as the chance of profit. That sounds reasonable and elementary, while real risk management strategies are way more complex. We will explain some cases as simply as possible.
How Much Should I Invest? The 1% Rule
Wise traders avoid taking risks worth more than 1-2% of their overall deposit. For instance, if you have $10000 in your account, investing a safe sum should be around $100-200. In case the asset of your choice goes in an undesired direction, you won’t lose too much. Divide the rest of your deposit into several small parts and invest it in different assets that you feel promising. A simple way to protect from risks is to invest in different spheres, not simply in different securities.
For example, when you invest in both pharmaceutical corporations and IT companies, you would expect they will not plummet simultaneously since they are barely connected. On the other hand, an investor holding a portfolio full of major hardware producers would be very upset because of something like a semiconductor crisis.
Does it Prevent Me From Losing Money?
Not always. For sure, diversifying your portfolio makes trading safer. However, you shouldn’t count solely on this advice. Always consider using the stop-loss order we mentioned above. Set it either so you won’t lose more than you can afford or just at the support level. A tool quite similar to stop-loss is take-profit order. The difference is that a stop-loss is dedicated to limiting losses, while take-profit closes the deal when the price reaches a positive target before it starts to decline again. Indeed, you can use these two orders together.
Risk/Reward Ratio: Stop-Loss and Take-Profit Combined
Make risk/reward a key part of your trading plan. Even if your investment strategy has a 50% of success rate — meaning that you “win” half of your trades — it does not necessarily mean you gain profit. If you make 100 deals with such a success rate where 50 of your positions make $100 loss, and the other 50 make $99 profit, you still end up with a $50 loss — all of that because you close your positive deals too early. Risk/reward strategy helps to fix that.
Imagine you make a deal where you decide to aim at a $100 reward and limit your risk by the same $100. That means that your risk/reward ratio is 1:1. If you set your take-profit at $200 and leave stop-loss unchanged, risk/reward shifts to 1:2. Notice that the risk part of this ratio should always be 1. It can’t be 0.5:1 in the case mentioned. However, if you set take-profit at $75, the ratio would be 1:0.75. Let’s get back to the case with a 50% success rate. If you preserve such conditions and implement a 1:1.5 risk/reward ratio — your profit would be $2500.
Each of the strategies we covered in this article has its cons and pros. What to choose? The decision is yours yet probably unclear. The good news is that Grand Capital will continue to lead you through the market with professional analysis articles and guide materials like this one. Stay in touch and let your trading make profits!