Many people confuse trading with investing. What’s the difference? In reality, these two terms are very far apart. The main difference between them is the time period of holding the assets. An investor is not concerned with short-term fluctuations in the asset’s price, and is generally more oriented toward long-term appreciation in the value of his holdings. In making an investing decision, an investor relies mostly on Fundamental Analysis. This is the analytical method of predicting long term prospects of the given asset.
The most popular approach among long term investors is called “buy and hold”. It means that you buy shares of some company and forget about them for a long time. Such approach can be very dangerous, even devastating in the extremely volatile market such as today’s Nasdaq. Let’s consider someone who bought shares of Amazon.com at their peak value of around $100 per share at the beginning of year 2000. One year later they were worth $10 per share. If that person had invested $100,000 , one year later his holdings would be worth $10,000. Such devastating losses can occur if “buy and hold” strategy is literally followed. Investing should not be about weathering storms together with your “loved” company; it is about making money.
On the other hand, a trader is trying to profit exactly on those short-term price fluctuations. Holding periods for active traders and day traders are very short, in many cases minutes, even seconds. All the day trader needs to make a comfortable living is to catch 1-2 point move in the stock price on any given day. The most powerful tool in the hands of day trader is his ability not to take a trade. He or she only takes those trades that have the highest probability of success. In their decisions, day traders rely mostly on Technical Analysis, a form of market analysis that is trying to predict shorter-term price directions. Download your free candlestick guide.
The most popular forms of active trading and day trading are:
Scalping – scalping is a form of daytrading that has the shortest holding timeframe. Scalper is trying to profit from very small movements in the stock prices such as ¼ or even 1/8. There are very, very few traders who are able to scalp successfully. Scalping is profitable only for brokerage houses and therefore I do not consider it as a viable trading option. Learn forex scalping.
Swing – swing trading is a form of short term trading in which you are waiting for a stock to hit certain support or resistance level and reverse its trend. This is very popular and viable trading approach especially in markets that do not clearly trend in either direction. Know swing trading.
Breakout – breakout trading is a form of short term trading in which you are waiting for a stock to pass through certain support or resistance level as a clear sign of continuation of that trend. It is also viable approach especially in the clear bull or clear bear markets.
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