When starting to trade, it is required to decide which time frame you would like to trade. When you hear of people "investing in the stock market" (such as a retirement account), this is most likely long-term investing. However, many people are starting to utilize short-term trading, such as day trading and swing trading, as a source of income or even a hobby. In this article, we will explore how to decide which time frame is best for you and how to do so efficiently.
Long-Term Investing
Long-Term Investing is the most common type of investing in the stock market and usually is any investment over 6 months. The main purpose for long-term investing is for growth and does not require much attention. This is because most investments in a long-term investor's portfolio are usually safe, blue chip stocks that have a very high chance of increasing over the long-run.
Long-Term Investing is the safest way to invest but do not expect high profitability until years down the road. If you are the type of investor who wants to keep putting money into an account and let it sit there to grow without paying much attention to it, then long-term investing is probably the best for you.
Swing Trading
Swing Trading is taking a position in a stock usually for any time frame between 1 day - 6 months. The main purpose for Swing Trading could be both for a source of income and for growth as well. A swing trader's portfolio does require attention more than a Long-Term Investor's but not as much as a Day Trader's. It is commonplace for a Swing Trader to look at their portfolio at least a couple times per day. Swing Trading does involve significantly more risk than Long-Term Investing.
Swing Trader's often utilize a combination of Technical and Fundamental Analysis. For example, a Swing Trader may determine a stock is good for buying by analyzing its fundamentals, such as financial statements, reports, etc., but then decide when to buy by utilizing technical indicators. Swing Trader's often like stocks with a high Beta (Comparison of this stock's volatility to the total market) because it allows for quicker profits.
Swing Traders is a very common type of investing for investors who enjoy investing and like to see quicker profits, but do not have the time or money to Day Trade. However, it does involve lots more risk than Long-Term Investing and takes a lot more dedication to their portfolio.
Day Trading
Day Trading is the least common type of investing of these three and is when a person buys and sells a stock in the same trading day. When deciding if you want to day trade, you must make sure you are not violating the Pattern Day Trader (PDT) Rule. The PDT Rule states that a trader can only make 3 day trades per 5 trading days, unless their account has over $25,000. If you violate this rule with under $25,000, your broker must lock you out of your account for 90 days.
Day Traders almost entirely depend on Technical Analysis for determining whether or not to buy a stock. However, many Day Traders like to trade intraday catalysts (Events that cause a significant change in stock price) which could be considered partial Fundamental Analysis. Day Traders have to be the most dedicated to their portfolio because they are often working with stocks that move very fast and could suddenly dip if they are not paying attention. Day Trading is, by far, involved with the most risk of any of the other types of trading mentioned above. This is because when you are trading with stocks that move very quickly, there is a pretty high probability that it can suddenly dip massively and you lose most of your money. It is important to assess this risk, as well as ensure you do not violate the PDT Rule, when deciding if you want to Day Trade.
Day Trading is the riskiest of all the types of trading mentioned before. It is important to do more research into Day Trading if you are interested because there are many arguments that state Day Trading is almost never profitable in the long-run, for most investors. If you are 100% confident you want to Day Trade, you must accept the heightened risk that comes with it and finally ensure you do not violated the PDT Rule.
Time to Choose
When choosing which time frame you want to trade, you must ask yourself 4 important questions:
1.) What is my purpose for investing?
2.) How much do I want to pay attention to my portfolio?
3.) Can I accept the risk that comes along with trading this time frame?
4.) Am I violating any rules with this form of trading?
These questions will help you determine which time frame is best for you. As an important note, many investors like to combine all 3 types of trading in their portfolio. For example, an investor may hold blue chip stocks for a long-term gain, Swing Trade faster stocks that may have catalysts coming up, and Day Trade stocks that have high intra-day volatility. However, this type of investing does require you to pay a lot of attention to your portfolio and could lead to mistakes that lose yourself money. Always be 100% confident in your abilities before starting to trade any time frame whatsoever.