Many people are first introduced to the financial markets through investing. The purpose of investing is to build wealth slowly over time, and this is typically accomplished through a buy-and-hold approach: making investments – such as in a stock, basket of stocks and mutual funds – and allowing price to fluctuate over time. Investors “ride out” the inevitable downtrends with the expectation that prices will eventually rebound. After years or decades, the investment will, in many cases, increase in value and provide positive returns for the investor. Long-term returns can be further amplified by compounding through the reinvestment of profits and dividends. Investments are often viewed as a means of building wealth to provide stability and income during the retirement years.
Where investments are typically held for a period of years or even decades, trading involves the frequent buying and selling of stocks, commodities, currency pairs and various other securities with the intention of generating returns that outperform a buy-and-hold strategy. Trading profits are viewed as income since profits are “taken off the table” on a regular basis (as opposed to investing where positions are generally left alone over the long haul). Trading profits are achieved through buying low and selling high, and trades are entered and exited within a relatively short period of time. This time period can vary from a few seconds to months or years, depending on the trader’s style. The following chart lists the four primary trading styles – position, swing, day and scalp – with the corresponding time frames and holding periods.
|Trading Style||Time Frame||Holding Period|
|Position Trading||Long Term||Months to years|
|Swing Trading||Short Term||Days to weeks|
|Day Trading||Short term||Day only – no overnight positions|
|Scalp Trading||Very short term||Seconds to minutes – no overnight positions|
Position trading encompasses the longest trading time frame in which trades span a period of months to years. Position traders may use a combination of technical and fundamental analysis to make trading decisions and often refer to weekly and monthly price charts when evaluating the markets. Typically, short-term price fluctuations are ignored in favor of identifying and profiting from longer-term trends. This style of trading most closely resembles investing; however, while buy-and-hold investing typically involves long trades only (profiting from a rising market), position traders may utilize both long and short trading strategies.
Swing trading refers to a style of trading in which positions are held for a period of days or weeks in an attempt to capture short-term market moves. In general, swing traders rely on technical analysis and price action to determine profitable trade entry and exit points, paying little attention to the fundamentals. Trades are exited when a previously established profit target is reached, when the trade is stopped out (moves in the wrong direction) or after a set amount of time has elapsed. Because swing trading takes place over a period of days to weeks (with an average of one to four days), this trading style does not necessarily require constant monitoring. As such, traders who are unable to monitor their positions throughout each trading session often gravitate toward this popular trading style.
Day trading refers to a style of trading in which positions are entered and exited on the same day. Unlike position and swing traders, a day trader does not hold any positions overnight; trades are usually closed using a profit target or stop loss. Day traders typically use technical analysis to find and exploit intraday price fluctuations, viewing intraday price charts with minute, tick and/or volume based charting intervals. Because trades are held for a period of minutes to hours, large price moves are uncommon, and day trading relies on frequent small gains to build profits. To leverage their buying power, day traders usually trade with margin. Day trading is a full-time job since positions have to be constantly monitored and traders need to be made immediately aware of any interruptions to technology (for example, a lost Internet connection or a trading platform issue).
Scalp trading is an extremely active form of day trading that involves frequent buying and selling throughout the trading session. Scalp traders target the smallest intraday price movements and rely on frequent and very small gains to build profits. Profit targets and stops are used to manage positions that are generally held for a period of seconds to minutes. Because gains are small on any one trade, scalpers may place dozens or even hundreds of trades each trading session. Precision is paramount with this style of trading, and scalping requires constant and alert attention to the markets.
What Style Are You?
Traders must consider a variety of factors when selecting a trading style, including:
- Account size
- Amount of time that can be dedicated to trading
- Level of trading experience
- Risk tolerance
In general, there is an inverse relationship between trading time frame and the amount of time you will have to devote to the markets. For example, position traders may be able to spend a couple hours each week evaluating and managing trades. Scalp trading, on the other hand, is a full-time job and these traders spend every minute of each trading session actively managing trades.
Many market participants – whether investors or traders – do not fit neatly into any one category. For example, many traders are also long-term investors, while others may primarily day trade with a few swing trades mixed in.