Day trading and long-term trading are two very different methods of trading the financial markets. Day trading is the practice of buying and selling securities within a single day ^[1]. This style of trading is rapid, volatile, and typically carries a high level of risk.

Long-term investing, on the other hand, entails buying and holding securities for an extended period. This type of trading is considered more conservative and often results in greater appreciation over time.

In this article, we focus on both day trading and long-term trading. 

Comparing Day Trading and Long-term Trading

There are many styles of trading: scalping, day trading, swing trading, and long-term trading. The difference that sets these styles apart is the length of time that trades are held open.

Scalp trades are held for a few minutes at a time. Trades under the day trading style are held for from a few minutes to a few hours. Swing trades are often held for a few days to a few weeks, and long-term trades are held from a few weeks to even several months.

The following table summarises day trading and long-term trading:

	Day Trading	Long-term Trading
Holding period	From a few seconds to a few hours. Trades are always closed before the end of the day.	From a few weeks to a few months
Strategy	Frequent entries and exits (both long and short) using technical analysis	Much less frequent entries and exits using the supply and demand strategy, together with technical analysis
Goal	To capture small moves of the market	Much less frequent entries and exits using the supply and demand strategy together with technical analysis
Number of trades	Large	Small
Return per trade	Smaller	Larger

Day Trading Explained

Day trading usually refers to the practice of opening and closing a position within a single trading day. It can occur in any marketplace but is most common in the Forex and stock markets. Day traders also utilise high levels of leverage and short-term trading strategies to capitalise on small price movements in highly liquid stocks or currencies.

Day traders will close all positions before the market closes every trading day. This is a hallmark of day trading and helps avoid unmanageable risks and negative price gaps between the close of one day and the open of the next.

The goal of day traders is to trade intraday price swings and hold positions as long as possible.

Day traders aim to capitalise on short-term market volatility. Trading based on the news is a popular technique. Scheduled announcements, such as economic statistics, corporate earnings, or interest rate decisions, are subject to market expectations and market psychology. Markets react when those expectations are not met or are exceeded—usually with sudden, significant moves—which can greatly benefit day traders.

Typical Entry Points for Day Traders

Day traders frequently use the following tools to time the entry of a trade:

• Lower-timeframe charts: timeframes below the daily charts are often used by day traders, including hourly, 30-minute, 15-minute, 5-minute, and even 1-minute charts. The lower-timeframe charts reveal the most up-to-date, rapid ebb and flow of the market and are ideally suited for day trading.
• ECN/Level2 quotes: the mechanisms of ECNs (electronic communication networks) provide bid and ask quotes from multiple liquidity pools at a given moment ^[2]. Similarly, Level 2 (a subscription-based service for Nasdaq) provides real-time order book data [3]. These tools can indicate whether there are more buy or sell orders at a given moment. This information can help traders determine whether buyers or sellers dominate the market.

Typical Exit Points for Day Traders

Due to the rapid pace of day trading, a systematic approach to managing existing trades is often used. Trailing stops and profit targets are commonly used tools ^[4].

Profit targets are often set using the following tools:

• Based on the previous day’s high (for long positions) or low (for short positions)
• Also, based on a momentum signal such as decreasing volume
• Based on the ECN/Level 2 quotes/Depth of Market reading, this is often used to read the balance of power between buyers and sellers

Long-term Trading Explained

The markets are always in flux, with prices constantly changing as traders buy and sell shares. While short-term trading can be profitable, it can also be incredibly risky, as prices can move quickly in either direction, leading to losses. For this reason, many traders use long-term trading strategies that involve buying and selling stocks or other assets over an extended period.

Long-term trading relies on fundamental and technical analysis using daily and weekly charts; it’s a trading style in which you hold the position for a much longer period.

While most forex traders come to the market with a short-term trading mentality and plan, long-term strategies can be used for traders to mitigate some of the short-term risks. Since long-term traders enter and exit the markets less frequently, they tend to pay lower commissions and spend less time on active trading and position management. In addition, the daily and weekly charts that long-term traders use tend to contain less noise, resulting in higher-quality signals based on their strategies. This leads directly to a lower level of stress for long-term traders.

Typical Entry Points for Long-term Traders

Long-term traders often use a combination of technical analysis to identify trends, which determine their long or short biases. Then, on daily or weekly charts, they can identify potential entry and exit regions using an asset’s supply and demand zones [5].

When demand for a particular asset exceeds supply, the price will rise as buyers outbid one another. Conversely, when supply exceeds demand, the price will fall as sellers compete to unload their stock.

This means that when the trader has a positive outlook on the asset, a long trade is entered once the price reaches the support zone. Conversely, if a negative outlook is present, a short trade is entered when the price rallies to the resistance zone.

Typical Exit Points for Long-term Traders

In a long trade, a long-term trader would actively manage an open long position when the price moves into a resistance zone. Conversely, a short trade would be actively managed when the price has moved into the support zone. At these support or resistance zones, a long-term trader would either exit the trade or move the stop loss to a short distance away from these zones in order to lock in profits.

Conclusion

Day trading and long-term trading are dramatically different styles, and traders with different strategies and objectives tend to use different tools and have very different holding periods and risk exposures.

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