Are you trying to decide whether to choose day trading or investing as your primary way of participating in the securities markets? If so, it’s essential to understand how these two strategies differ. While both practitioners use detailed statistical analysis, buy and sell securities, risk their own money, and aim to earn a profit, there are critical differences in the way they go about their business.
In addition to working with vastly different time horizons, day traders and investors use technical indicators in varying ways, don’t have the same risk tolerance levels, and engage in their activities for unique reasons. In many ways, the two techniques couldn’t be more unalike. Here’s a checklist of comparison points between traditional investing and day trading.
Time Horizons
Investors look at a much broader time horizon than daily trading practitioners. That means they can take their time studying long-term trends, changing market forces, economic factors, and dozens of other components that affect their portfolios. Day traders don’t have the time to focus on so many factors. Instead, those who go to cash at the end of each session look more closely at minute-by-minute price action, immediate news stories, company announcements, and other forces that tend to move values up or down on short notice.
Reliance on Indicators
Both traders rely on technical charts and fundamental indicators for guidance, but day trading is more beholden to short-term technical studies like moving averages. People who specialize in investing often emphasize fundamentals like management experience, price earnings ratio graphs, consistent payout of dividends, and new product releases. Single session practitioners typically use a combination of averages and real-time price action, as well as their unique knowledge of how a particular security behaves, to make buying and selling decisions.
Risk Tolerance
Day trading involves much more risk than standard investment-style activity. Investors can choose the amount of volatility and risk by selecting stocks based on recent history and known price parameters. Those who make all their buys in a daily session can’t pick and choose as liberally. They’re more tied to what a given security does in a short period and are often beholden to price surges and drops before the closing bell.
Career Focus
Many day trading enthusiasts view the practice as a part-time or full-time job, while those who favor investing can spend as little as one hour per month overseeing a portfolio. As a career, day trading is probably the more popular activity. Keep in mind that investing professionals frequently take part in swing trading and large-scale buying and selling as part of a regular, home-based job.
Specialization
Anyone who buys and sells securities can choose to specialize in just one or two corporations’ shares. However, daily trading professionals are more likely to develop expert knowledge in a single company. This fine-tuned focus on the behavior of one corporation allows day traders to gain a sixth sense of daily price action and the behavior of their specialty issue. An investor’s practice can include specialization but more often includes several securities to build a diverse portfolio.