Day trading versus position trading

Day trading means you don't hold a position overnight. Day traders argue that this is intrinsically safer, because you are not exposed to external events that may happen overnight, such as a sudden fall in the Dow. And indeed, some but not all brokers require a lower margin for day trading, suggesting that the risk is lower.

By the same token, you are giving up the big gains that can be made over time, limiting your profits to the day's trading range, which is usually between a half and two per cent.

A typical day trader ploy might be to buy at moo (at market on opening) and sell upon publication of some key economic figures, on the basis of 'buy the rumour, sell the fact'.

The opposite to day trading is position trading, where you take up a position over a number of days, weeks, months or years.

I do not agree that day trading is less risky. On the contrary, the vast majority of day traders lose, while the vast majority of long-term stock buyers win. This is one case where the old adage "a long-term investment is a short-term investment gone wrong" has to be stood on its head.

To see why, try taking each type of trading to its extreme. Imagine "60 second trading", where you have to get in and out within 60 seconds : will it be easier or harder to predict which way the market will go over the next 60 seconds?  Harder, of course : how you can you possibly know what factors will influence the market over the next 60 seconds? This is gambling, not trading.

Now imagine "60 year trading" - will it be harder or easier to guess whether the market will have risen or fallen 60 years from now? Easier, of course - there has probably never been a period in history when a stock market has fallen over 60 years. Moral : trade long term, not short term.

 

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