Short-term vs. long-term trader – which one are you?

Securing a successful career in the largest financial market requires the right approach, a proven strategy, proper research and knowledge regarding the market. However, as a beginner in this domain, apart from choosing the best forex brokers determine the amount of time you will be able to invest to reach your financial objectives. Deciding whether short-term trading or long-term investing would suit your preference and availability can help you gain better clarity regarding modifying your existing strategy, tools and approach. 

Basic definitions of short-term trading and long-term investing

The amount of time invested in the forex market determines if one is a trader or investor. Short-time trading involves entering and exiting positions every day – trading currencies that tend to last a few minutes to even seconds. The primary profit objective in short-term trading is to take benefit of the market fluctuations within a brief span of time.

Long-term investing, on the other hand, focuses on opening trades for a much longer span of time. Where in short-term trading the approach revolves around the buy-and-sell technique, in long-term investing it’s more likely a buy-and-hold approach. 

While ‘time’ is the most obvious factor that differentiates the two approaches, there are other aspects including skills, required capital, personality traits, potential gains to take into account when deciding which approach to adopt. However, both of the trading approaches are profitable in their own way. Day trading focuses on profiting from smaller gains from constant market fluctuations and demands the market participant to be attentive and vigilant. Long-term investing focuses on generating a source of passive income and eventually wealth generation in the long run. 

  • Different personalities and skills

The personality trait of the market participant varies subsequently when determining the right approach for them. When it comes to day trading one must possess the skill of being vigilant and keeping an eye on the market in order to gain profits from the price fluctuations.

Long-term investors, on the contrary, need to stay patient even when the market is going against them – since their objective is to gain profits in the long run. Irrespective of the type of trading approach, it requires one to conduct thorough knowledge of the market and a tried-and-tested strategy in order to be successful in FX. 

  • Potential risk and reward

Investing for the long term offers less exposure to risk and the possibility to lose capital for the investor. In investing you may minimize the risk associated with the market fluctuations. An investor may earn greater returns over a certain period of time and lets you invest a relatively smaller amount of investments at a time. 

In day trading, the monthly gains can be higher but so is the risk associated with it. Since day traders make a profit from the minor price fluctuations, day traders need to invest a substantial amount of capital in order to generate sound profit. The risk factor increases here since the trade can also go against your favour which then leads to a loss. 

  • Brokerage commission 

Since day trading requires initiating and executing multiple trades in a single day, the brokerage commission plays a crucial role for day traders. This is also something to take into account when choosing a broker for them as well. For long–term investors such factors rather come insignificant since such types of market participants prefer to buy and hold a position for a longer period. 

  • Potential gains

The primary objective of any type of trading approach comes down to profit potentiality. Long-term investing results in generating a substantial amount of profit without impacting much on the performance or risking your capital. Even if the profitability of day trading is much higher, the risk potential also increases simultaneously. A day trader can make up to 3% profit on their capital a day which turns around as high as 10-60%. Long-term investors, on the other hand, can expect an average of 10% overall. 

Conclusion 

Investing in forex involves diverse strategies that are short-term or long-term specific. However, a clear understanding of both approaches can help you to make the right trading judgments and thrive in the market.