Pros and cons of long-term vs short -term trading

March 13, 2016 15:39

Dear Traders,

You have probably wondered whether you should trade long or short term? Indeed, the decision is critical as it will define both your trading strategy and your mindset.

From the outside, it probably seems like the long-term trading approach would be easier in terms of the stress involved in making trading decisions. Think again. My last eight years of trading experience,tell me that neither way is less or more stressful than the other.

Instead, the crux of your decision should rest on deciding which trading style best suits your personality and to do so prior to making your first trade. The early research will give you confidence in executing the method within the required time frame and help you understand what to expect based on your chosen style's characteristics.

Short term trading in a nutshell

Let's start with defining what short term trading is - namely holding a position for no more than four working days. And bear in mind that these intraweek swing trading positions are not considered scalping. Scalping means holding a position for a couple of minutes or less.

The important benefit of short term swing trading is the fact that your capital is only at risk for short periods of time. So if you make the wrong decision on a trade, you will know it within a few days or the same week. This provides you with the chance to free-up your capital, to use for new trading setups. Trading over a shorter time horizon, has lower capital requirements than longer term trading i.e. because the latter generally requires a sizable capital outlay.

When trading short term, you can easily determine the expected risk/reward profile of a trade. This is because in short term intraday or intra week swing trading, the profit targets and the risk are both well defined. When you have this consistent clarity, it's usually not a problem to plan where you will enter and exit the trade - especially if you use profit stops

Another benefit of short-term trading, is the ability to define market orders.These help you during your intraday or intraweek setups, so you can manage your potential entries daily.

However, short term trading has its disadvantages too. First off, it's expensive on an ongoing basis. This is due to covering for high trading costs associated with short trade holding periods and potentially frequent entries plus exits.

Additionally, correct short term trading risk management is challenging because of the market's momentum and volatility. As a short term trader you must learn how to exploit the latter factors to your advantage, with highly market-reactive decision making.


Long term investment explained

During my career, I have differentiated between investing and trading. For me, investing is long term trading, so I believe trading and investing are diametrically opposed.

When you open a long term trade, you usually set it and forget it. And admittedly, unlike short term trading, you don't have the stress of constantly babysitting your trade or keeping odd hours to participate in the market's action. This is because long term investors observe the future and neglect current market conditions.

However, because long term trading does not frequently reuse capital, a successful long term trader's ROI is not as high as that made by the short term counterpart.

Drawdowns can be huge with long term trading too and investors need to pay for overnight swaps much more than short term traders do. Infact, with long term investing it seems impossible to triple your account in less than a month.

Check-out my video explaining why I prefer being a short term trader (i.e. a daytrader) and what things you should consider when making decisions about time horizon. And if you have time over, feel free to share your opinion on short versus long term trading below.

Cheers and safe trading,

Nenad

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