Deciding to implement a short-term trading strategy or a long-term trading strategy depends highly not only on what your objectives as an investor are, but also on your capital availability, your time commitment, your skills, and even your personality. The truth is, both strategies have pros and cons and both are important for a diversified portfolio.
Short-term trading involves entering trades and exiting them within a short period of time. In day trading for example, you would hold trades for seconds or minutes taking advantage of quick market fluctuations. The decision-making process for a trade that is going to be held for a short period of time is completely different than that of a trade that will be held for a long time.
At Lots of Options we are big fans of short-term trades. Here’s why:
- No capital is tied up for long periods of time. When you buy an asset to hold for a long time, you tie up your capital in that asset for the long haul, and if you pick a lagging stock, this can be painful, whereas when you buy an asset for the short term, you get in and out fast, adjusting swiftly to market conditions, and freeing your capital quickly.
- You see results quickly. When you buy and hold, seeing results can take a long time, since you may be holding the asset for 5, 10 or more years. When you trade in the short term, your results are reaped much sooner.
- Compounding occurs daily in short-term (day) trading since profits are locked in daily, allowing you to profit on prior gains in addition to the already deposited capital. Let’s say you invest $30,000 and make a 10% profit per month. The following month you would have an investment capital of $33,000. Keep in mind that the opposite can also be true and investments can decline just as quickly, so make sure you keep your risk management strategy in check.
- Short-term trading gives great flexibility to your investment since you can liquidate quickly without needing to wait for an asset to mature in order to get your cash out.
- Faster bounce back. When you buy an asset to hold and the market crashes, leading to a prolonged bear market, it can take a while before those assets bounce back in value, making investors attached to their portfolios as they hope for the market to turn around. When you trade with a short-term strategy, you may lose some and win some, but it is easier, emotionally, to get out of losing trades and bounce back.
If you are considering a short-term trading strategy, and you’re trying to decide where to focus your efforts first, consider the above benefits and determine if short-term trading is the right strategy for you.