The team at UMPI has put together a list of the most popular and recommended types of trading for new stock traders. These strategies include Day Trading, Swing Trading, and Intraday Trading. We will be looking at some of the pros and cons for each variation of trading and try and explain why certain strategies are used by newcomers to the stock market.
It is probably a good idea to start with Day Trading because a lot of people are probably familiar with this concept. We will start by taking a look at the positive and negative effects of day trading and what you should expect when day-trading as a beginner.
Three Popular Trading Strategies
#1 – Day Trading
Day Trading in the stock exchange is a risky strategy that is commonly used by a lot of traders that engage in stock trading. This short term trading strategy involves traders buying and selling shares from a single company in the same trading day.
Several stock exchanges offer margin trading for day traders although many of them impose limits against traders with margin requirements and day trading requirements. It is also important to remember that there is a limit to the amount of day trades per trading week if your portfolio balance is below $25,000. This pattern-day-trader restriction is automatically lifted when you raise your portfolio balance above $25,000.
Some professional traders consider day trading to be similar to gambling. Other traders believe there is a special skill that relates to day trading. The truth of the matter is that it is incredibly risky and you really need to have a lot of confidence in your decisions or you might face heavy losses.
Pros
- Massive Potential for Financial Gains
- You Don’t Hold Stock Positions Overnight
- Margin Leverage is Available for Day Traders
Cons
- Day Trading can be Extremely Risky
- Lots of Transaction Fees
#2 – Swing Trading
Swing Trading is a little bit safer than Day Trading because you don’t have to make as many trades within a single trading day and you typically rely on technical analysis a little bit more to make your decisions. You might trade stocks five or six times per week when you swing trade instead of making five or six trades per day while day trading.
Many traders that focus on swing trading like to use momentum indicators on their technical analysis to help make trading decisions. Momentum in the stock market is an incredibly important aspect if you want to be successful. You have to use momentum to your advantage and trade into stock positions that have significant upward momentum. High-frequency traders need to learn about the important trading indicators that relate to momentum.
Pros
- Less Risky than Day Trading
- Less Transaction Fees for Trading
- Great for Beginner Traders
Cons
- Requires Technical Analysis in Many Cases
- Less Volatile and Less Potential for Rapid Financial Gains
#3 – Intraday Trading
Intraday Trading is similar to Day Trading except traders will not buy and sell their positions based on small fluctuations in the market. You might see an Intraday Trader hold their shares for several hours or even days before attempting to sell their position for a profit.
This is a great alternative to day trading if you don’t have the $25,000 minimum portfolio balance that is required to utilize unlimited day trades per week. A lot of swing traders also like to balance out the differences between day trading and intraday trading by combining several of the main strategies between the two options.
Pros
- Requires Less Capital to Trade Effectively
- Much Safer than Day Trading
Cons
- Less Potential for Large Financial Gains
- Not Ideal for Traders with an Aggressive Trading Strategy
Frequently Asked Questions (FAQ)
What is the best trading strategy for me?
If you want to be an aggressive trader with large potential for gains and losses, then you are probably going to want to focus on day trading. You will need a minimum portfolio balance of $25,000 and a margin trading account for this to be an effective strategy. You can improve your profit potential by eliminating transaction fees by using a trading platform like Robinhood or WeBull.
Less aggressive traders should focus on swing trading. You won’t have the same potential for massive gains in a single trading day, but you also will have much less risk. You also don’t need to worry about having a portfolio balance of $25,000 for the pattern-day-trader restriction.
What are the investment requirements for each strategy?
It is highly recommended that you have at least a portfolio balance of $25,000 for day trading. There are no minimum investment requirements for swing trading although it is recommended that you start with a reasonable amount to get started.