Becoming an Active Day Trader Vs. Long Term Trader
I want to preface this blog with the fact that I am almost uncomfortable making this post. I don’t really consider the difference between a long-term and short-term trader to be that vast, and not NEARLY as important as what makes a good trader. But people always ask what the difference is and what they should do, so I want to try to make some distinctions between the two.
I want you to take a moment and think about a professional sports team. Let’s look at a professional NFL Team. What do you think would happen if Tom Brady (a quarterback) decided to play on the offensive line? For those who don’t know football, he would be crushed. Tom Brady is one of the best Quarterbacks (if not the best) of all time. However, his skill set does NOT match what would make a good lineman. The players on the line should be BIG and STRONG. Whereas Tom Brady needs to be FAST and ACCURATE. Now I am not saying Tom Brady is not strong, but he had to find the role on the field that best fit his skills and attributes. And while in practice, Tom Brady will not be working on blocking he will be working on throwing.
Yeah, I hear you. You’re saying, “Get to the point.” Well in the same way that a professional athlete needs to play the position that best fits his skillset, a trader needs to find their best fit in the markets. Now I am NOT saying that you need to choose right now whether you want to day trade, swing trade, or invest, but rather it is something you should always be analyzing. Where is it that you succeed? I am not even saying that you MUST choose one role. As they develop, most traders end up having a mixture of strategies in order to become diversified. And if you are a beginner you will not know where your strengths lie. So, you are at a disadvantage compared to the athlete who has grown up his whole life playing in a specific position. But you have an advantage in that it will not be hard to find your place in the market, and you won’t be relegated to a single role. The best part about the markets is that if you can find success as a short-term and a long-term trader, then do both!
So, if you are new, or don’t know where your place in the markets is, what should you do? Well ultimately being a good trader results in you working on yourself more than anything, so you should always be starting within. Work on your patience, your market knowledge, your discipline, get your reps in, and ultimately just start immersing yourself. You will start to see where you tend to look when it comes to trading. But when comparing short-term/day trading and long-term swing trading you tend to see certain characteristics take priority. This is NOT an exhaustive list; it is more our take on some of the traits that tend to make a good short vs. long-term trader.
SHORT TERM TRADING
When I say short-term trading in this instance, I am just referring to day trading. That involves entering and exiting a trade within the same day (sometimes within seconds or minutes). So, as you would imagine, speed can be a day trader’s best friend. Being able to enter and exit quickly and efficiently can be the difference between success and failure. If you are trading fast, volatile stocks then you don’t have the luxury of taking your time in entering your orders.
Time invested is also a big difference when it comes to day trading. You need to be trading much more often. You can’t afford to miss a good day or a good trade. You need to be in early to read the news for the day. You need to find the next hot stock or play. Versus a long-term trader who is more of a sniper and does not need to necessarily get in as early every day.
Organization is also going to play a big part in day trading. And what I mean by organization is being able to track multiple stocks at once. You do NOT want to be following dozens of stocks at once, you will not be able to watch them all, especially starting out. But you want to have alerts set for important levels and be able to manage multiple positions at once as you progress.
Decisiveness can make or break a day-trader. If you are wishy-washy and cannot commit to the decision quickly, you will end up hurting yourself. You need to see a play develop, think about all the possible outcomes, plan for each one, and commit to your trade. Then when that trade develops you need to follow your plan. You cannot create a plan and then divert from that plan as soon as the trade starts moving.
LONG-TERM TRADING
Think of a long-term trader like a sniper. You see your target, you gauge the wind and environmental conditions, you line up your shot and you only pull the trigger when it matches your desired criteria. Disclaimer: I have never actually tried shooting a gun at long range so if I have given a bad metaphor for you actual snipers, I apologize but bear with me.
Therefore, Patience and seeing the bigger picture are important for a long-term trader. You don’t need to necessarily worry about what a stock is doing that minute or hour. You care about where it fits in the daily perspective and where your best entry is. Making sure you maximize how much you are aiming to gain vs. how much you are risking is important. If you are impatient and enter a trade before it develops or before it reaches your optimal entry point, you could turn that winner into a loser. And a long-term trader who tends to have fewer trades does not want to waste a potentially profitable trade. There could be days or weeks where you don’t enter a new trade if it does not suit you.
Having a larger Macro View of the markets also tends to better suit a long-term trader. Your stocks are probably going to be at greater mercy to the movement of the market than the day traders. A stock can have movement and price action independent of the market on a minute-to-minute level. But when it comes to the movement of the stock over weeks and months, if the market, or at the very least the sector the stock competes in, is moving one way, your stock may very well tend to follow. Now it is obviously optimal if you can find a stock that has an order flow that is independent of the market but having a good macro view of things will always help you better understand why a stock may be moving in that direction.
I actually believe that having a decent basic understanding of Fundamentals can benefit a trader. Let me preface this by saying that I am much more of a technical-based trader. I look at the stock charts and patterns and look at price action. However not knowing the fundamentals of a company could hurt you in the long run. I am NOT saying you need to pour through the company’s documents, prospectuses, and income statements. But rather you should understand if the company has been reporting good earnings, what their sales are looking at versus forecasts, and what the fundamentals of the company generally look like. That is because from a Long-Term perspective, fundamentals tend to have a MUCH greater impact than on an intraday level. A company that makes no money and has terrible fundamentals can go up easily in a day, or even a week. But over the long-term, it is going to be hard for that company to sustain growth and higher prices if the company is failing.
Now ultimately if you could learn all these practices and traits, you would become a better trader for it. The best traders I have ever seen out there have strategies that fit from both long-term and short-term perspectives. There will be periods in the market where one set of strategies will do better than others because of the market environment. So, diversifying yourself will only benefit you. But you need to know where your strengths and weaknesses lie as a trader. Finding your place in the market, and strengthening that position before you branch out to others could greatly improve your time in the market.