Day Trading vs. Investing, What’s best?

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Day trading vs Investing

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Many traders love to get involved in day trading vs. investing in the long term because of the viability of both security trading options. 

When you make trades that are only seconds and minutes long, while also using short-term fluctuations in an asset price to your advantage, you are day trading. Day trading enables all options to be opened and closed on the same day.

On the other hand, when you are involved in long-term investing, you make trades that can be open for months, sometimes even years. Instead of taking on quick trades that last for minutes, you buy and hold a deal for some time. 

There are different personality traits required for both types of investment, and also different skillsets. However, both systems converge at a particular point for the time spent on each trade. This middle ground is called swing trading, and it happens when trades last for a few days to a few months.

There are different capital requirements, potential returns, time commitments, personality traits, and skill requirements for both day trading vs. long-term investing. To have a diversified investment portfolio, you should have a healthy mix of day trading and long-term investing. Long-term investments can serve as a good source of passive income and long-term wealth generation, while day trading can be a good source of daily revenue.

However, if you are just getting started in investing and don’t know where to focus your efforts, there are four areas you can look at to make the right decision.

Let’s study them.

Day trading vs. investing: Minimum Capital Requirements

Day trading of stocks in the US comes with a requirement that you maintain a brokerage account balance of $25,000. There is no legal minimum capital requirement for day trading in the currency markets, but you should start at $1,000. For day trading futures, begin with $5,000 to $7,500.

The most typical place where long-term investing happens is the stock market. There are expiry dates for futures, so they usually don’t work well for long-term trades. You can also use currencies to trade long-term. However, there are limited options for this trade. That is because opening long-term trades to an environment of few stable and investable currencies does not make sense, especially when compared to the vast number of stocks and ETFs available, and since these stocks and ETFs can be used in the indirect trading of currencies and futures.

The requirements for starting capital depend on the investment option you choose. Even though there are no set requirements, you should consider commissions carefully before making trades that require a small amount of capital.

 

An Example: The Cost of Trading Commissions

Let us assume that you pay your broker a commission of $7 per trade. That’s a 7% fee if you’re buying $100 worth of stock per time. The commission is taken from every profit made. It is much different if you buy $1,000 worth of stock at a time; the $7 commission to your broker is worth just 0.7% of your capital. The amount of money invested determines how expensive the commission charge is percentage-wise.

Also, remember that there is another commission payment to be made when your position is sold. If you invest $100, you need to make 14% of profits just to break even, compared to another person who spends $1,000 and needs only 1.4% to break even. Very clearly, putting a higher capital is much more profitable than anything lower. 

Make sure you have $1,000 or more before you consider investing in stock or ETF (However, some ETFs can be invested in without any commissions with some brokers). By doing this, you prevent brokers from taking a large chunk of your capital for every stock purchase.

Day trading vs. investing: Differing Time Commitments

For day trading, you have to set two hours aside every day to work on your investments. When US markets officially open, for the first 60 minutes, you have different opportunities to capitalize on significant price moves. When it is lunchtime in New York, the stock activity slows down.

The best time to get the best opportunities is in the first or two hours of trading after the market opens. You must get prepared just before the market opens. Also, try to review your trades every day and at the end of every week of trading.

It takes about 15 hours of commitment every week if you are just day trading lightly (for about 2 hours a day) and about 40 hours of dedication if you are day trading most of the day.

If you are trading in the US markets, your best bet is to focus on the market’s opening time every morning if you want to get the best deals on stocks, currencies, and futures. Also, European stock and currencies markets and other parts of the global markets, are usually active near the European time for opening. If you live in the US or Canada, that could mean trading in the morning or the middle of the night. If you can’t cope with these options, then day trading may not be for you. Maybe you should consider a long-term investment.

Investing time commitment:

If you invest in the long-term, you can do it at any time and research it properly, even if you have an office job that takes most of your time. The most significant time commitment required in long-term investment is during the capital deployment phase, where you have to spend some hours per month going through stocks to find the ones that best suit your investment strategy. Also, you will spend a lot of time building an investment strategy when you start.

You can choose to be active and spend a lot of hours doing research, especially if you want to deploy a considerable capital or enjoy multiple trading opportunities. You can also choose to be the kind of investor that sets and forgets, doing only a bit of research now and then and checking on your investment after a few months when you’re ready to make another purchase.

 

Skills and Optimal Personality Traits

Securities trading of any kind requires a lot of upfront time commitment for research and the creation of a working strategy. Also, to ensure you don’t deviate from your system or plan because of fear and greed that can arise when you have to make tough decisions about your capital, you have to spend time internalizing your strategy and learning how to implement it.

You need emotional discipline in day trading and long-term investment. Your already formulated and reliable strategy should guide you on observing different trade triggers and on opening and exiting your trades accordingly. If you open or close trades using your emotions, you can make undisciplined decisions and end up with poor results.

Also, you need patience for both day trading and long-term investment. However, the type of patience required is a different sort. For day traders, they are always active, so they see every little price movement. These small price movements can be attractive and cause a day trader to trade when he shouldn’t. Every day traders should instead wait for the buy and sell triggers before they make a trade.

For long term investors:

Long-term investors, on the other hand, should wait for trade triggers. Even though they are not continually monitoring their trades like day traders, the temptation to trade without triggers can happen. For this reason, patience is required by investors to keep their emotions at bay so that they don’t make hurried trades until they see valid trade triggers.

Intelligence is also required if you want to be successful in day trading, but not the kind of intelligence you get in college. You must be able to translate the knowledge in books into real life and actionable expertise if you want to succeed in trading. That includes getting the big picture and breaking it down into a few easy-to-follow guidelines you can understand. 

Keep breaking down challenging concepts like this until you have a clear strategy that enables you to open, exit, and manage trading risks. Consider trying out your approach to historical data (called back-testing) to see how well it performs. You can spend some time doing this with a demo account until you are comfortable with it. When you have internalized the strategy, you can try it out with some real capital. Once in a while, you can tweak your system and plan a little bit to see if it works better.

Who Offers Higher Potential Returns?

Attempting to compare the potential returns from day trading vs. long-term investing is like comparing apples to oranges because they require different time commitments to make them profitable.

Long-term investments can bring you millions of dollars without having a significant impact on your performance. However, you can see a reduction in percentage performance, even if you have an account of several hundred thousand dollars. Due to these differences, it isn’t straightforward to compare the potential returns of day traders with that of long-term investors. 

Day trading:

For day traders, a 0.5 to 3% profit on the high-end daily is possible. As small as this may seem, it could mean anywhere between 10 to 60% in a month. You can get higher percentages when you run small accounts, but big accounts generally have returns of about 10%. 

When you are day trading, you can have your gains increase exponentially. For example, if you start with $30,000 and make 10% per month, that gives you $33,000 to start the next month. At the same 10%, you have $36,300 for the next month. This kind of compound returns happens because profits are locked in daily. This means that gains on prior gains (added to deposited capital) can make your account blow up in no time. Unfortunately, the reverse could also be the case. Your account can rapidly decline if you are losing 1 or 2% every day.

Investing:

If you are an individual investor, you shouldn’t worry about accumulating a lot of capital. There are lots of stock that you can choose to give you a longer-term time frame with which you can gather and dump positions, with the average long-term investor getting about 10% per year.

That 10% average takes a long time to happen because some years could have lower or higher returns than 10% (negative returns happen every four years). If you are an active and skilled investor, you can beat the average (10%), and some strategies have shown that they can get up to 20% or even more. Compounding in long-term investments takes time because they are often held for years.

Trades that last several years until the profits are gotten cannot be used to produce more profit. That is one aspect in which day trading is better: rapid profit compounding. However, the difficulty involved in deploying more capital on day trading makes it unwise to use it alone on your investment portfolio. 

Therefore, the best investment portfolio strategy is to use both trading styles so that you can have the right mix of their pros working out to increase the returns on your investment.

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3 Comments

  1. Shay

    Great Article. Great arguments. Keep up the great work. Shay

    Reply
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