Day Trading Vs. Long-term: Which Is Better For Long-Term Goals?

Day trading and long-term investing are different approaches to the markets. Day trading is buying and selling on small price movements within a trading day, often in intervals of seconds or minutes. Long-term investing is buying or selling after long periods of holding an investment and waiting for the right price.

Let’s explore further which Is Better for Long-Term Goals:

What is Day Trading?

Day trading is the practice of buying and selling stocks in a short time frame, typically a day. The goal is to earn a tiny profit on each trade and then compound those gains over time.

Compounding is defined as the reinvestment of interest earned from an investment, rather than being paid out periodically to the investor. Compounding is like interest on interest, a way of making an investment grow exponentially over time.

With the rise of online stock brokers like Robinhood and cheap trades, day trading has become a more viable way for retail investors to earn substantial money. However, the risks of day trading ought not to be forgotten here.

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How does Day Trading work?

Day traders rely heavily on stock or market fluctuations to earn their profits. Their favorite stocks are those which are regularly going up and down during the day. They also like highly liquid stocks, ones that allow them to move in and out of a position without much affecting the stock’s price.

Day traders might buy a stock when the price is inching up or short-sell it if the price is falling, trying to profit on a stock’s fall. Day traders might buy the same stock multiple times a day, just to take advantage of the changing investor sentiment or changing market trends. Either way, the stock with fluctuating prices is always their pick

Buying on margin is a practice day traders use where they use borrowed money and trade with them. With a margin account, traders can use the securities they already own as leverage to borrow up to 50% of the value of the security they’re going to buy. Adopting this practice can give profits a substantial push, even beyond which they could have achieved otherwise. However, losses in this case will also be substantial.

The Day Trading and Technology Bubble of 2000

Day trading became a cultural phenomenon during 1997-2001. During this period, the Nasdaq Composite index rose from under 1,000 to over 5,000. This rose was mainly due to the momentum from technology and Internet stocks. The media highlighted stories of day traders earning $ 5 – $ 10,000. This piqued investor interest in day trading. Initial public offerings (IPOs) commonly soared triple digits on the open minting overnight millionaires by the barrel.

However, the bubble burst during the bear market of 2000 – 2002. The technology bubble burst triggered a massive market sell-off as the S&P 500 index collapsed 58 %. Even worse, the technology-heavy Nasdaq Composite index collapsed a whopping 78%, from a high of 5,048 on March 10, 2000, to a low of 1,114 on October 9, 2002!

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Best Day Trading Techniques

Here are some of the most popular techniques day traders can adopt:

Trend Following – buy a stock when prices are rising overall or short sell when prices drop in the primary trend.
Trend Reversal – This trading strategy assumes a price rise will reverse and drop. The trend reversal trader buys during a decline of the markets or short sells during a rise of the market, expecting the price trend to change.
Scalping – Scalping is one of the best day-trading strategies for confident traders who can make quick decisions and act on them. Here the day trader exploits small price changes. Scalping trading strategies involve entering and exiting a position within seconds with a high number of shares traded. The scalper sets buy and sell targets and sticks to these predetermined levels.
Trading the news – Markets react to catalysts such as company earnings, mergers and acquisition news, etc. The volatility caused by such news can be beneficial for day traders since prices can move faster in a more extended way.
Momentum Trading – Investor jumps on a stock whose price is moving up. Momentum stocks are rare and hard to find. Stock usually jumps around 30 – 40 percent.
Pullback Strategy – The first step in the pullback strategy is to look for a stock or ETF with an established trend. Next, monitor the trend until there’s a price decline from the trend. If the established trend is upward, then the downward price movement — or pullback — is an entry point for the day trader to buy.
Breakout Trading – A breakout trade takes place when the stock price rises above the former top resistance price. Investors have to monitor the level of stock trading volume or how many shares are changing hands. That’s because breakout trades on high volume are more likely to be sustainable at the new higher price than those breakouts with less volume.

Day Trading Tips and Tricks

Here are some of the best day trading tips to become a great and more profitable day trader:

Set Stop Loss and Take Profit Target – Whatever your position is as an investor, you have to set a take profit target (TP), where you close your position for a profit. Investors also need to set a stop loss (SL), where they close their position for a loss if the trade doesn’t work out. Once investors set their stop loss and take profit, stick to it. This way they will be able to protect their trading account and avoid the mistake dragging too long in anticipation of more profit.
Trade patiently – If traders start trading on hunches and gut feelings, anything can happen. Therefore, trading with patience is very important when there are no trade setups and they need to act fast with confidence when they get a trade setup. The majority of people that quits day trading, are too greedy and lack patience, which leads them to rush decisions and make big losses.
Use Technical Analysis – Technical Analysis is very important in day trading. One of the most popular price action trading strategies/techniques is support and resistance trading. Always look to buy (go long) at support levels and sell (go short) at resistance levels.
A good understanding of the market – Every day trading strategy investors use should be based on the behavior of the market. Not every market is the same and they have to consider every detail. Investors have to understand how the market works from the really simple details like trading hours to the complex details like trading psychology.
Master Risk Management – Higher risk equals higher potential profit. Therefore, day traders have to be good at risk management. In day trading, a Risk Reward Ratio (RRR) above 1 on every trade is important to have a higher potential reward compared to the risk.
Be consistent – One of the most important trading tips to become a great day trader and make consistent profits is to be consistent. Always stick to the plan, risk management, and most importantly control impulsive behavior.
Trade multiple strategies – Trading at least two strategies can be really helpful. In case one of your strategies doesn’t give you setups, you can use the other one. The more strategies you have the better.
Educate yourself – A good day trader invests in improving his skills and educating himself.
Start small – Investors who practice day trading will have days when there will be no profits. Therefore, it is advised to start small with an amount of money they can afford to lose. Once they get the hang of day trading, they can expand their investment portfolio and risk portfolio.

Best Trading Platforms for Day Trading

Here is a list of popular trading platforms for day trading:

Fidelity
Merrill Edge® Self-Directed
Interactive Brokers IBKR Pro
TD Ameritrade
J.P. Morgan Self-Directed Investing
E*TRADE
TradeStation
Zacks Trade
Firstrade
Ally Invest
Charles Schwab

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What is Long-Term Investing?

Long-term investing is the practice of buying and holding investments for more than a year, usually with the goal of seeking long-term gains despite short-term volatility. Long-term investments can include stocks, bonds, real estate, cash, mutual funds, and exchange-traded funds (ETFs). Long-term investors are willing to take on more risk for higher rewards45and pay long-term capital gains taxes upon sale.

Best Long-Term Investment

Good long-term investments exist in every category of financial assets. Let’s look at the:

Stocks

- - Individual Stocks – Investing in individual stocks is much riskier than investing in mutual funds or ETFs. But they can also provide a greater return than a diversified portfolio.
  - Growth and Value Stock Funds – Growth funds are ETFs or mutual funds that invest in growth companies. They aim to provide investor returns through rapid price appreciation, rather than dividend income. Growth funds often invest in some of the largest companies by market capitalization or the total dollar value of their outstanding share. Value funds, meanwhile, look to invest in companies the market may have undervalued based on their fundamental finances. These tend to be more stable, well-established companies that have long histories of rewarding investors with dividends, even though their future growth may be much slower than growth companies.

Bond Investments

- Bond Funds and ETFs – They invest in bonds and other income-producing investments rather than equities.
- Treasury Inflation-Protected Securities (TIPS) and I Bonds – These bonds are virtually risk-free thanks to their track record of repayment.

Crypto Investments

Individual Coins – Investing in single coins is risky but they also yield the highest returns. The best way to go ahead with this is to invest in popular established coins like Bitcoin and Ethereum.

Crypto ETFs – Crypto ETFs are relatively new, but they’re already a large and growing category of investments. These ETFs operate similarly to stock and bond ETFs and allow investors to own a basket of cryptocurrencies.

Crypto-Related Assets – These include stocks of cryptocurrency exchanges or blockchain companies. As an added bonus, many of the companies’ valuations are not as volatile as the cryptocurrencies themselves,

Strategies for Long-Term Investing

Income Strategy – This includes investing in companies that provide above-average distributions without the risk of default, such as large-cap and blue-chip equities. Also, investors should seek companies with major drivers of long-term shareholder returns. They include a business’s competitive advantage, its growth prospects, and the competence of its management team rather than quarterly reports and stock prices.

Capital Growth Strategy – The capital growth strategy aims to maximize the appreciation of all the securities in the portfolio over a period of 10 years or more. It is achievable through aggressive allocation, which is highly risky. Investors usually select target-date funds, as the primary goal of the investment is to fund college educations or retirement plans.

Balanced Investment Strategy – This strategy is aimed at combining investments in a portfolio such that the risks and returns are evened out. Typically, stocks and bonds make up equal percentages of the holding of such a portfolio. Such a strategy is most suited to investors with a medium risk appetite.

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Long-term investment examples

All assets carry risk and the risk is price volatility. However, this can be avoided to the best with long-term investing. Here are some of the most popular examples of long-term investing:

Retirement Accounts – Retirement accounts are by definition long-term investments and provide particular tax advantages, as well as penalties for withdrawing early.
ETFs, index funds, and mutual funds -For diversified stock funds, the risk tends to be limited to short-term volatility.
High-Yield Savings account – A high-yield savings account in particular, which has become increasingly popular, is a type of account that pays 20-25x more savings and interest rates than a standard savings account.
Robo Advisor Account – They are AI-driven, algorithmic-based digital platforms that provide financial advice, trends, and information that can help out investors. These kinds of accounts require little to no fees and can provide a plethora of services.
REITs – They own massive amounts of real estate and properties all over the world. From houses to apartment complexes, warehouses, and data centers to medical buildings, real estate conglomerates are booming right now.
Peer to Peer Lending – It connects lenders with investors at the source. It eliminates the middleman of a financial institution.

Best Long-Term Investment Strategies

Long-term investing strategies are often recommended to reduce the impact of short-term fluctuations in the stock market. Here are some of the best long-term investment strategies that work:

Avoid Timing the market – Don’t buy and sell rapidly as the market falls and rises. Short-term gains or slumps are not indicators of future market trends.
Stick to your investment plan – Have a predetermined amount that the investor can comfortably invest. Invest at specific intervals, and don’t react to market swings.
Seek investments that match your investment goal – Having a financial goal is important. And what is equally important is risk tolerance. As long as the investments match the investment goals, they will not be prone to making too many emotional decisions.
Diversification – No investor is unknown to the benefits of diversification. In worst-case scenarios, diversification helps investors not to lose the whole of their invested amount.

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Which Is Better For Long-Term Goals: Day Trading or Long-Term Investing?

Day trading and long-term trading are two different styles of trading. Traders of different trading strategies and objectives tend to use different tools and have very different holding periods and risk exposures to their trades.

However, the question is which is suitable for long-term goals?

The answer to this lies in the individual investor’s financial goals and objectives.

If you are interested in making trading your job and can actively manage your trades on a daily basis with higher profit potential, then day trading is the best match for you. Keep in mind, investors need to be passionate about trading and have no trouble staying up to date with the market and global economic changes.

However, if an investor seeks long-term growth of their investment portfolio without the hassle of keeping track of their investments daily, then long-term investing is the key.

Long-term investing is advised when:

The investor has a low tolerance for risk
The investor can’t afford to lose their investment
The investor has a career that they want to pursue
The investor does not have time to analyze stocks
The investor wants to protect and grow their savings
The investor is content with modest profits

Day trading is advised when:

The investor has a high tolerance for risk
The investor has extra capital to gamble or lose
The investor wants to be his own boss
The investor has strong market knowledge
The investor is not nearing retirement
The investor wants big profits

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Day Trading Vs. Long-term Investing: Which Is Better For Long-Term Goals?