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Day trading, or intraday trading, all takes place within 24 hours. Technically, longer-term trading refers to anything beyond that one-day period, but for most traders, longer-term trading involves weeks, months or longer. Day traders may also conduct longer-term trades and long-term traders may do some intraday trading. However, the strategies and analytic tools differ for each type of trading. Longer-term trading is also part of an investment strategy, while day trading is more akin to gaming than investing. In either type of trading, traders can profit or lose money depending on their securities choices and timing.
As with any type of trading, the aim of day trading is buying low and selling high. The day trading difference is that such buying and selling takes place within 24 hours. The day trader aims to take advantage of small price movements within that time period. A day trader must have a high-risk tolerance to achieve success.
Before getting started with day trading, traders must develop a day trading strategy and should perform paper trades on a simulator before trading with real money. They need access to day trading software and the charts and analytic tools necessary for successful day trading. Day traders must develop entrance and exit strategies for their fast-paced trading.
Since day trading is risky, traders should only use risk capital – funds they can afford to lose. A rule of thumb is to only risk 1 percent of trading capital per trade. The average day trader makes dozens of trades daily. They also take advantage of leverage offered by brokerage companies, allowing them to take positions that are more than the money in their trading account. For example, if a day trader has $20,000 in his trading account, 2:1 leverage allows him to purchase securities worth twice that amount, $40,000.
Besides buy-and-hold investors, who may not sell securities for years, there are other types of longer-term traders. These include swing traders, whose positions are held for days or weeks. If day traders opt to take longer-term positions, they often decide to swing trade.
Since day trading is done on an intraday basis, it requires more of a time commitment from traders. Successful day traders spend at least two hours daily trading, and many of them trade throughout the day. The two-hour minimum is really for those with a job outside day trading. The most active time for North American day traders is when the U.S. markets open, but should a day job get in the way they can trade the European markets which are open late at night in North America. For these day traders, their best timing coincides with the London markets opening.
Long-term traders don’t experience the same time constraints. They can do their research and make their trades at what they feel are the appropriate times. Many long-term traders take the time-honored route of purchasing high-quality stocks and holding on to them for years. It’s the “slow and steady” form of investing, relatively safe over the long-term but not too exciting.
Day traders rely on various tools to guide them when buying and selling. Multiple monitors for their computers can aid in tracking analytics and a security’s performance, as well as keeping traders up-to-date on the day’s news. Information about a particular stock or industry can suddenly affect relevant stock prices. There is a myriad of tools available for day traders to conduct technical analysis, and the trader’s decision is usually a matter of personal preference. Such tools include charts, which the trader must learn to read, and oscillators, which portray overbought or oversold conditions. Other valuable tools include volume indicators, breadth indicators – showing overall market sentiment – and overlays, which show price movements. Day traders also depend on trading strategies, again a matter of personal preference. Common day trading strategies include the simple trend strategy, which involves “riding the trend,” range strategies, which indicate the security’s support and resistance levels, and breakout stock trading. The latter occurs when a security breaches its resistance point.
Long-term traders rely more on fundamental analysis, looking for a stock’s intrinsic value. It means examining a company’s financial statements and digging through the balance sheet, cash flow statement and income statement. An in-depth analysis of this information reveals the fundamentals of a company, and from there a long-term trader can decide whether its stock will rise or fall within a certain period and buy or short shares.
One major difference between day trading and long-term trading is the amount of return the traders seek. A day trader may seek returns of 10 to 15 percent monthly, while a long-term trader hopes to attain the same level of returns annually. In that sense, day trading and long-term trading is based on a different psychology. Successful day traders must outperform long-term investors. Otherwise, day trading makes little sense because of its inherent risks. Day traders look for more frequent profits which are smaller in nature than the less frequent profits of long-term traders.
Whether you’re a day trader or prefer to trade on a longer term, you need a competitive brokerage with a state-of-the-art platform. SureTrader offers low fees and low minimum balances, top trading analysis and 6:1 leverage for intraday traders. For novice traders, we provide a simulator, so you can learn to trade and develop strategies before using your own funds. That’s just part of the SureTrader advantage.
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