Investors hold stocks longer term, mostly years, some even forever, while traders get in and out of their trades in a matter of weeks, days, hours or sometimes only minutes. With some stocks, you have to wait a few weeks for a catalyst or technical pattern to play out. Some traders like the action and don’t want to wait weeks for the payoff. These traders prefer to be in and out of the market continuously. Trading is more speculative than investing, but some risks are automatically 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.
Intermediate-term 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.
Shorter-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 (but perhaps more frequent) 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 and particularly day trading, when you’re in and out of a position within the same day 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 move so that they don’t get shaken out by market noise.
That means they have to be able to tolerate some moves to the downside. Shorter-term traders take smaller losses, but they need to have the mindset to be able to take them quicker.
3. What strategy makes the most sense for me?
Do you like to trade based on earnings reports, volatility, charts, valuation, or FDA approvals? Certain catalysts will lend themselves to shorter- or longer-term trading styles. If you like to trade the markets based on volatility, your trades will likely be short-term in nature. If you love trading biotech stocks based on upcoming clinical trial data, your trades will have a longer duration.
If you’re new to trading, start off by asking yourself which style appeals most to you. If you’re an experienced trader and you’re not achieving the results you want, may be these questions clear whether you’re trading that best suits your personality and circumstances.
Sven Franssen