Ensuring a successful career in the biggest financial market requires the right approach, a proven strategy, proper research and market knowledge. However, as a beginner in this field, in addition to choosing the best forex brokers determine the amount time you can invest to reach your financial goals. Deciding whether short-term trading or long-term investing would suit your preferences and availability can help you better understand modifying your existing strategy, tools, and approach.
Basic definitions of short-term trading and long-term investing
The time invested in the forex market determines whether one is a trader or an investor. Short-term trading involves entering and exiting positions every day – trading currencies that tend to last anywhere from minutes to seconds. The main profit objective in short-term trading is to take advantage of market fluctuations in a short period of time.
Long-term investing, on the other hand, focuses on opening trades over a much longer period. While in short term trading the approach revolves around the buy and sell technique, in long term investing it is 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, capital required, personality traits, potential gains to consider when choosing the approach to take. However, both business approaches are profitable in their own way. Day trading aims to profit from the smallest gains resulting from the constant fluctuations of the market and requires the market participant to be attentive and vigilant. Long-term investing focuses on generating a source of passive income and eventually generating long-term wealth.
- Different personalities and skills
The personality trait of the market player then varies when determining the right approach for him. When it comes to day trading, you have to be vigilant and keep an eye on the market in order to take advantage of price fluctuations.
Long-term investors, on the contrary, must remain patient even when the market is unfavorable to them, as their goal is to earn long-term profits. Regardless of the type of trading approach, it takes in-depth knowledge of the market and a proven strategy to be successful in FX.
- Potential risk and reward
Investing for the long term offers less risk exposure and the possibility of losing capital for the investor. By investing, you can minimize the risk associated with market fluctuations. An investor can earn higher returns over a period of time and allows you to invest a relatively smaller amount of investments at a time.
In day trading, the monthly gains may be higher, but so is the risk associated with it. Since day traders profit from minor price fluctuations, day traders need to invest a substantial amount of capital in order to generate solid profits. The risk factor increases here since the trade may also go against your favor, which then results in a loss.
Since day trading requires initiating and executing multiple trades in a single day, brokerage commission plays a crucial role for day traders. This is also something to consider when choosing a broker for them. For long-term investors, these factors are rather insignificant, as these types of market participants prefer to buy and hold a position for a longer period.
The main objective of any type of trading approach comes down to profit potential. Investing for the long term allows you to generate a substantial profit without affecting performance too much or risking your capital. Even though the profitability of day trading is much higher, the risk potential also increases simultaneously. A day trader can make up to 3% profit on his capital per day, which can reach 10-60%. Long-term investors, on the other hand, can expect an average of 10% in total.
Investing in forex involves a variety of specific short-term or long-term strategies. However, a clear understanding of both approaches can help you make the right business decisions and thrive in the market.