There is a difference between trader and investor. Day traders get in and out of their trades in a matter of hours, sometimes minutes. Day traders rarely hold positions overnight. Long-term investors usually own, often dividend raising, stocks for years. They even try to find stocks that raise their pay-outs every year and therefore are able to hold indefinitely. Investors hold long term, traders are in and out quickly. Traders like the action and don’t want to wait weeks for the payoff. While trading is more speculative, some risks are eliminated. You can’t get attached to a stock because you’ve held it for a long time or because you believe in the story of this particular stock.
Intermediate-term traders or position traders typically own stocks for a few weeks or longer. They’re waiting for a story to play out, such as an earnings report, a drug approval or a completed chart pattern. They’ll usually set stops that give the position some room to move. That way, they won’t get shaken out by market noise, but they also won’t suffer too large of a loss if the trade goes against them.
Short-term traders will hold a stock for a few days or less. They’re usually exploiting strong moves in the market or stock.
They’ll typically take smaller losses in exchange for more frequent trading opportunities and wins.
When deciding what type of trading style is best for you, ask yourself the following questions:
1. How much time do I want to commit?
Shorter-term trading usually requires you to stay in front of your computer during the trading day, so you can make moves all day long.
Traders who expect to be in trades for a few weeks don’t have to spend as much time tied to their computers.
2. What’s my tolerance for risk?
Traders who stay in positions for several weeks usually give their positions more room to fluctuate so that they don’t get stopped out by market noise. They have to be able to tolerate some moves to the downside. Short-term traders take smaller losses, but they need to be able to pull the trigger and take them quickly, probably more frequently.
3. What strategy makes the most sense for me?
If you prefer to trade based on earnings reports, volatility, charts, valuation or FDA approvals then certain catalysts will lead to shorter- or longer-term trading styles. If you base your trades on volatility, your style will likely be shorter-term.
Beginners should ask themselves which style appeals most to them. An experienced trader, not achieving the results he wishes for, with same questions could shed some light on whether he is trading in a way that best suits his personality.