One of the biggest questions for newbie traders, is what strategy works better – short term or intraday trading. In this piece we will examine only two of the three types, short-term and intraday trading. Let us begin by defining these two types of trading.
Short term traders have a perspective of a few days up to a few months, and thus have trade positions within this range. Short term traders often closely follow news events to catch market trends and attempt to profit off buying underpriced stocks or short selling overpriced stocks. Employing a heavy amount of fundamental analysis, most short term traders trade based on 5 minute interval to 60-minute charts when making analyses and decisions. Short term traders often make a few trades a week, and often employ broader stop loss thresholds.
Intraday traders, also known as day traders, have extremely narrow perspectives, on the market. They scrutinize micro opportunities on 1-minute to 15-minute charts. Day traders are often seen as punters, as they go for quick profits, entering multiple trades in a single day, often even many times within a single hour during high activity market opening hours. Day traders employ technical analysis on charts, and rarely carry out fundamental analysis. Day traders are simply there for the profit, and are rarely concerned in the merits of the underlying assets. Some day traders also make use of news events to their advantage, though not a priority. Day traders thus also employ much tighter take profit and stop-loss thresholds.
Risks of Short-term vs Intraday Trading
You might quickly realize from the definitions above, that day trading is much higher risk, as it has little basis on fundamental analysis. In comparison, short term trading, while still seen as risky by long-term value investors, is a lot less risky than day trading as it is grounded in the proper study and understanding of the intrinsic value of the underlying assets. As long as the analysis is accurate, short term traders can ride out temporary losses even when the market goes against predictions for a wide variety of reasons, as prices tend to correct towards intrinsic value in the long run. For day traders, due to tight stops, losses might be realised very quickly before the market has an opportunity to correct its course, even when their predictions are right.
So which is better?
The answer to this question is not straightforward, as it depends on your experience as a trader. For a beginner, it might be a very bad idea to jump into higher risk day trading right away, as it is easy to lose your entire capital if you are not careful through day trading.
The quick nature of day trading can either suddenly make you very rich or lose all your capital – very much like in gambling. Moreover, your broker makes a commission on each position, so even if you are right half of the time, which would already be quite impressive for a beginner, you would still be slowly losing money to commission charges.
Starting out with short term trading however, might train you to stomach losses gradually, as well as riding out losses that might potentially turn into profit trades. It takes a lot more hard work to study a company’s financials, but it is hard work that’s absolutely necessary for starting out in trading.
However, if you’re a seasoned trader who has the market on your fingertips, day trading presents an opportunity to grow your investments fairly quickly. Just be sure that you know exactly what you’re doing before you jump into day trading.