For beginners in the trading industry, a lot of things can be confusing and complicated.
There are a number of questions newbie traders may ask themselves: what assets should I choose? what time of the day should I have my trading sessions and how do I maximize my profits?
However, it’s important to become acquainted with the basics and decide if you want to be a trader or an investor.
Yes, it might sound like the same thing but there is actually a significant difference in the strategies of investing versus trading.
So let’s start at the beginning.
The Timing and Strategy : Trading
Whichever strategy one chooses, the main goal will always be making a profit from trading activity. However, this goal may be pursued via short-term or long-term trades.
Trading is focused on studying current trends and using technical analysis to predict whether the price will be moving up or down in the next weeks, days, or even minutes.
So to be a trader, it’s important to stay in touch with the market at all times, react fast to the changes and closely follow the events that may affect the price trend at this moment.
Traders jump in and out of trends depending on the market conditions by performing frequent transactions and generating returns within a specified period of time.
For short-term traders, it’s not as significant whether the asset has the potential to become an important player in the market or whether the company behind it has a good roadmap for their product.
All that matters is correctly predicting the movement of the price at this exact moment. These types of traders often use protective tools such as stop-loss order to automatically close out losing positions at a predetermined price level minimizing potential loss and/or maximizing potential profit.
Meanwhile, investors are focused on the long-term potential of a stock. They think in terms of where their holdings will be in years or even decades.
They often hold out through the market’s ups and downs refraining from any instant reactions, waiting for the perfect time to liquidate their positions.
For investors, it’s the company’s potential that makes or breaks it so they ask themselves the difficult questions: who is involved in the project, how is their roadmap getting fulfilled so far, is the technology behind the asset useful and applicable to the needs of the world?
So investing in the stock market can often be compared with a more traditional outlook on generating profit from the funds that one has, like purchasing real estate or physical gold and silver with the goal to sell it later at a higher price.
Therefore, for investors, day-to-day fluctuations don’t make much of a difference while the potential of the asset over the long-term period is the main focus.
The Capital and Time Available
When choosing between long-term and short-term trading, it’s important to take a look at factors like how much time and funds one has on their hands.
This will determine your trading strategy and the assets that can be used to reach your desired profit goal.
There is no exact requirement for a minimum amount to begin trading but having at least $1,000 available capital is recommended because of existing commissions per trade and possible returns that can be generated. When trading futures, it’s best to start with at least $5,000 to $7,500.
Long-term investing is typically done in the stock market because futures have an expiry date, so they are not ideal for long-term trades.
It isn’t reasonable to open long-term trades in an environment of relatively few stable currencies when compared to the variety of stocks and ETFs to choose from. They can be used to trade futures and currencies indirectly.
It’s also important to assess your overall budget considering opening and closing positions often require a commission to be paid. If a broker charges a commission of per trade, for example, $5, when buying $100 worth of stock at a time, it will be a 5-percent fee which is deducted from any profit made.
However, compare that to buying $1,000 of stock at a time, where the $5 fee is only 0.5 percent of the invested amount. While the commission charge stays the same when it’s compared to the capital invested, it becomes more expensive percentage-wise if an investment is only a small amount.
So assessing the starting capital is important to make sure the fee is not eating up a good chunk of the profit as is choosing an exchange with lower-end fees and/or set fees.
For traditional stocks, InteractiveBrokers with $0.005 per share on the standard platform and Fidelity with $0 for stock/ETF trades could be good places to start.
Another important factor to consider is how much time one has on their hands. It is essential to trade daily, typically at least two hours each day. For example, in day trading, most profit comes from activity during the market’s opening hour or two.
Besides, there are also the time differences between the U.S, European and Asian markets that should be considered depending on what assets you are using and where they are in demand.
Attentive traders should also keep reviewing their positions each day and at the end of each week.
Total time spent will add up to about 14 hours per week at least, and up to 40 hours per week if trading most of the day. If these options are not suitable for your lifestyle, short-term trading may not be a good fit.
Research and Analyse for Investing
On the other hand, investing for the long term will require fundamental research that can be done at any time, even during the spare time from an office job.
When you have the capital and it’s ready to be invested into a position, several hours per month should be spent looking through stocks and choosing the ones that meet the criteria to reach the highest potential returns.
Some people choose to be more active and spend a couple of hours per week doing market analysis (especially if they have large amounts of capital to deploy and are looking for multiple stocks to choose).
For the investors who like to take their minds off their portfolio once it’s chosen, only a bit of research needs to be done. These investments can then be checked every few months, possibly when another purchase can be made.
In the long run, investing is generally for those people who want to make money in the long-term and steer clear of sudden losses. They hope to gain a decent percentage by re-investing their funds and generating profit in the long-term.
Traders are action-oriented people who love to experience the volatile market conditions and the thrill of reacting to them. Daily short-term trading and weekly swing trading are best designed for adrenaline-loving types of individuals who don’t necessarily mind losing sometimes in order to make profits.
Trading and long-term investing both take a lot of patience, but a different kind of patience. Traders are always active, potentially making many trades a day, although they still need to wait for their buy and sell trade triggers to react. Watching every little price movement can easily push a trader into making a trade when they should just step away.
On the other hand, long-term investors must also act only based on valid indicators. They don’t have to constantly watch their positions and worry about every little price fluctuation, so the temptation to trade doesn’t occur as often.
That is why any investor must learn to only take action when a valid trigger occurs, and that could mean looking through various charts for weeks without finding any fitting opportunities.
Trading or investing: which is more profitable?
There is no exact answer because both long-term investing and short-term trading can generate huge profits and cause a significant loss.
Trading may seem like a way to get higher returns quicker, but that can never be a guarantee. If there is a 10% return each month, a bad day or multiple bad days can still put you at a loss.
With a serious enough loss, you may not only have lost a lot of your money, but you might have to put more of your own capital into your account to maintain your minimum balance.
Short-term trading involves a lot more risk and requires a lot of knowledge of the market and the ability to make quick decisions.
Long-term investing, though, is also no guarantee of eventual success. Quite a bit of research is needed to make the best possible decision about the company in which you want to invest. It’s more likely to grow at a slower pace than the ideal trading account would, but that will add up over a longer period of time.
Ultimately, the best thing to do when deciding whether to pursue investing or trading strategies is not to consider which one will bring greater returns. Both have potential and both come with risks. Finding the one that is most comfortable for the personality and resources you have and doing as much preparation as you can is what determines whether you will be successful doing it or not.
This article is contributed by Tradesanta team. Tradesanta helps you automated your trades.