In one of my recent articles, Trading is a Game, I mentioned four terms that describe different types of trades: Day, Swing, Short-term and Long-term. For today's article, I thought it would be a good idea to go over each of these different types and discuss the unique aspects of each. This will focus on stock trading, but most of what will be said can apply to options or most other tradable assets. Day Trading includes trades with very short holding periods. These trades are entered and exited during the same trading session, lasting anywhere from a few hours to just a few minutes. Sometimes the trader is attempting to make money off the bid/ask spread or inconsistencies in price that develop for other reasons. Sometimes the trader is simply using technical analysis practices similar to what is used for any other time period; day traders are just looking at much shorter intervals. One of the problems with day trading is that you will be subject to "pattern day trader" rules that are imposed on all brokers and therefore private traders by the SEC. You are classified as a pattern day trader if you enter and exit a trade, on the same day, four or more times in any five-day period. Pattern day traders generally must keep a minimum amount of equity in their margin account of $25,000. This is a bit more money then the average "hobby" trader has to work with, so most of the time people who day trade often are professional traders with plenty of capital to work with. Swing Trades are held overnight for at least one night but can last for up to about a week while short-term trades usually up to about a month or two. Most of these trades are completely based on technical analysis of some kind. Usually this is a system of oscillators or overlay indicators such as Stochastics or Parabolics that the trader has devised to provide quick gains in a short period of time. Sometimes these trades are event driven, meaning that the trader takes a trade based on what he/she thinks might happen after an earnings report, for example. Long-term trades can last for several months or sometimes for even more then a year and often blur the lines between "trading" and "investing." The difference being, that trades are based on historical patterns of a stock while investments are entered based on an evaluation of the company's current and future business prospects. Sometimes what is commonly considered "fundamental" data, such as P/E Ratio or Market Cap can be used in a way similar to technical data (i.e. your system works best with small cap stocks so that is one of the filters on your system). This is a very basic guide. Ultimately your trading style is based on the system that you develop for yourself, how much risk you want to take, how much money you can devote to trading and how much time you can spend on it every day. |
