The difference between long-term trading and investing :
However, it is important to distinguish between long-term trading and stock market investing. While investing consists of building up a portfolio of securities, most often shares on the stock market, with the aim of receiving dividends, long-term trading consists of trying to profit from market movements and price differences to generate capital gains.
The advantage of long term trading is that it does not require all the time of the investor, which allows the investor to have a professional activity and not to be obliged to spend hours each day in front of the screen. Psychologically, long-term trading will be less stressful than short-term trading.
Psychology is indeed one of the most important elements in trading and individual traders often tend to be overwhelmed by their emotions, which has an impact on the way they manage their positions and therefore on the effectiveness of their trading strategy. In short-term trading, rapid price movements due to short-term volatility in an asset can quickly lead to a panic reaction that will lead to irrational decision-making.
With a long-term strategy, emotions are easier to manage as the focus on the charts is not as intensive. Even the most seasoned traders sometimes find it difficult to concentrate on the price curves without stress. It is therefore better to have time to step back and think about other things in order to better analyse the markets.
As far as the strategies you can implement with long term trading are concerned, they are as numerous as the short term trading strategies. You can therefore take advantage of all the tools and features offered by your broker or dealer to implement automated strategies using stop and limit orders for example.
This type of trading will allow you to define a clear strategy in advance and stick to it without the temptation to change it or jeopardise your money management as the event that triggers your order is likely to occur at a time when you are not monitoring your positions.
The advantages and disadvantages of long-term trading :
Like any trading strategy, long-term trading has major advantages and disadvantages that you should be aware of before embarking on this adventure.
Let's start by looking at the major advantages of this long-term trading strategy:
- More time for analysis: First of all, long term trading will give you much more time for chart and fundamental analysis. It will be possible to take the time to define the best entry and exit point of the market and to place stop and limit orders at the best levels according to the signals obtained.
- Lower volatility: long-term trading also avoids the sometimes erratic and highly volatile short-term movements caused by high-frequency trading by institutional investors.
- The ability to trade trends: Long-term trading offers you the opportunity to trade on the underlying trends of an asset, which is often more stable than the short-term trend of the asset.
- Saving time: As mentioned above, long-term trading also saves time if you have a professional activity on the side. It allows you to carry out more in-depth analysis, but also to devote some of your time to training in trading and improving your skills.
- Reduced stress and better emotional management: with long-term trading, the trader will experience less stress than with intraday trading. It is easier to detach oneself from trading and concentrate on other activities by simply checking one's positions from time to time and following the market news. Short term trading is very time consuming and addictive and will require much more concentration, which will lead to additional stress.
- Less biased signals: Finally, one of the advantages of long-term trading is the quality of the signals obtained through analysis. False signals are more frequent in the short term than in the long term.
Of course, there are also major disadvantages to long-term trading, the main ones being
- Lower returns: Long-term trading strategies usually offer lower returns than shorter strategies, simply because of lower volatility.
- Slower gains: your long-term strategy will of course not allow you to generate gains every day, the idea here being to keep your positions open for several weeks or months.
- The need for a good upstream strategy: you should also consider putting in place an effective strategy before you take a long position by placing orders with the right trigger points.
- Unforeseen risks: Finally, a long-term strategy can involve unforeseen risks, particularly if an event suddenly changes the direction of an asset's trend. It will therefore still be necessary to stay focused on the markets in which you invest.
Conclusion: should you focus on short-term or long-term trading?
The choice between short-term and long-term trading is primarily a personal one, as the risk/reward ratio of the two methods is very different. If you tend to be emotionally unmanageable or do not have a lot of time to devote to your trading activity, then long term trading may be preferable in terms of management and organisation.