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Day Trading vs Long-term Trading: What is the Difference?

TABLE OF CONTENTS

Day Trading vs Long-term Trading: What is the Difference?

Day Trading vs Long-term Trading: What is the Difference?

Vantage Updated Updated Fri, 2024 January 19 04:01

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

Long-term investing, on the other hand, entails buying and holding securities for an extended period of time [2]. This type of trading is considered to be more conservative and often results in larger 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 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 summarizes day trading and long-term trading:

Day Trading Long-term Trading
Holding periodFrom 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
StrategyFrequent entries and exits (both long and short) using technical analysisMuch less frequent entries and exits using supply and demand strategy together with technical analysis
GoalTo capture small moves of the marketTo capture long-standing trend
Number of tradesLargeSmall
Return per tradeSmallerLarger

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 utilize high levels of leverage and short-term trading strategies to potentially capitalize on small price movements that occur 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 this avoids unmanageable risks and negative price gaps between one day’s close and the next day’s price at the open.

The goal of day traders is to trade intraday swings in price and stay in trades as long as possible.

Day traders aim to create trading opportunities on short-term market volatility. Trading based on the news is a popular technique. Scheduled announcements such as economic statistics, corporate earnings, or interest rates 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 that are lower than the daily charts are often used by day traders, and they include hourly charts, 30-minute, 15-minute, 5-minute, or even the 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 [3]. Similarly, Level 2 (a subscription-based service for Nasdaq) also provides real-time reading of Order book in real time [4]. These tools can give traders indications to whether there are more buy orders or sell orders at a given moment. This information can be used by traders to decide whether the buyers or sellers are dominating the market.

Typical Exit Points for Day Traders

Due to the rapid progression of trades in day trading, a systematic way of managing the existing trades are often used. Trailing stops and profit targets are common used tools [5].

Profit target are often set using the following tools:

  • Based on previous day’s high (for long positions) or low (for short positions)
  • Based on 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 a state of 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 and lead to losses. For this reason, many traders use long-term trading strategies, which involve buying and selling stocks or other assets over an extended period of time.

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 of time.

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 less commissions for their trades, and also spend less time in active trading and managing positions. In addition, the daily and weekly charts that long-term traders use tend to embed less noise, thus resulting in higher quality signals based on the traders’ strategies. This leads directly to less amount of stress for the long-term traders.

Typical Entry Points for Long-term Traders

Long-term traders often use a combination of technical analysis to identify the presence of a trend, which determines their long or short biases. Then on the daily or weekly charts, they can identify potential regions of entry and exits using supply and demand zones of an asset [6].

When there is more demand for a particular asset than there is supply, the price will go up as buyers outbid each other. Conversely, when there is more supply than demand, the price will go down 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 when the price has reached the support zone. Conversely, if a negative outlook is present, a short trade is entered when the price has rallied up 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 trade when price has moved 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 two dramatically different styles of trading, and traders of different trading strategies and objectives tend to use different tools and have very different holding periods and risk exposures to their trades.

References

  1. “Day Trading: The Basics and How to Get Started – Investopedia”. https://www.investopedia.com/articles/trading/05/011705.asp . Accessed 20 Jul 2022
  2. “Forexpedia – Babypips”. https://www.babypips.com/forexpedia/long-term-trading . Accessed 20 Jul 2022
  3. “Electronic Communication Network – Investopedia”. https://www.investopedia.com/terms/e/ecn.asp . Accessed 20 Jul 2022
  4. “Level 2 – Investopedia”. https://www.investopedia.com/terms/l/level2.asp . Accessed 20 Jul 2022
  5. “How the Trailing Stop/Stop-Loss Combo Can Lead to Winning Traders – Investopedia”. https://www.investopedia.com/articles/trading/08/trailing-stop-loss.asp . Accessed 20 Jul 2022
  6. “Price Action Trading Strategy: Supply & Demand Zones – FlowBank”. https://www.flowbank.com/en/research/price-action-trading-strategy-supply-demand-zones . Accessed 20 Jul 2022
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