Day Trading versus Buy and Hold Strategies

Day Trading versus Buy and Hold Strategies

Day Trading requires a bit of work, research and learning a trading platform. Granted I do day trade, but not as much as I have done in previous years. If anything, a portfolio manager has a first priority of protecting investments. But within reason, there are situations when Day Trading is beneficial.

Reasons to Day Trade

I think day trading (or intraday trading) is useful especially when the markets are extremely volatile, and especially when the markets are tumbling.

When the markets tumble, it’s good to look for stocks that are trying to climb back up from a big drop. These whipsaw movements in price action will create opportunities to trade, especially if you are trying to capture stocks on their way back up.

How to know when to buy? Common indicators are simple moving averages. In a shorter chart like a one month chart you can set 7, 35 and 100 moving day averages. When the 7 DMA crosses above the 35 DMA, that usually is a buy signal. And we use the 100 DMA to help us indicate an overall upward trend in a large range. This is good because as long as the 100 DMA is moving upward and our 7 and 35 DMAs are above the 100 DMA, things could be looking pretty good. We also look for a low RSI of 30 and positive volume which means there are a lot of buyers.

Another reason to day trade is within a situation when there is a bear market, and if you have pulled out stocks and sold them to help cut your loses. You’ve created more cash to day trade, but buyer beware. Day Traders will need to cycle their cash through their buying and selling of stocks. Whenever you buy and sell a stock, you need to wait 2-3 business days for the funds to settle. So, you have to portion out your cash reserves in a manner that will allow you to day trade 3-4 times a week. For example, $100,000 in cash could be used to manage 5 $20,000 day trades for the week. This is just an example as there are many strategies that can be used. Be creative.

The Benefits of Buy and Hold Strategy

Every time you day trade, you are creating commission fees for buying and selling a stock, but hopefully your brokerage firm allows free trades. But, the act of buying and selling a stock generates capital gains tax because you are buying and selling a stock on the same day. Imagine the taxes you will rack up if you are buying and selling stocks 3-5 times a week.

With buy and hold strategies, you are holding long as the stock price goes up over time, and if you have a great stock that has sound financials and a good track record of stock price growth, there is no need to continue to day trade the stock, just sit back and monitor the stock without having to continually buy and sell. If the stock is a winner whatever losses you have incurred with get ironed out over time and you could eventually reach 25%, 50% and even 100% profit by just sitting on a great stock. But the work should’ve been done beforehand. Vetting the stock for sound financials and fundamentals is essential.

But buying and holding a stock is easier than constantly buying and selling stocks in order to achieve the same monetary goal.

A day trader wants to mostly sit on cash, so that s/he can have the funds to buy and sell stocks all in a single day. An investor buys and holds a stock and is thus investing in it for the future growth. Day traders don’t really care about the company or whether it’ll be profitable in the future. S/he is only concerned with price action and being profitable for the day, then ideally everything becomes cash at the end of the day.

In Summary

I am preferring more and more a buy and hold strategy, as day trading does cause a certain amount of anxiety and stress, and you have to spend hours in front of a computer screen buying and selling, monitoring stocks. And chances are in day trading you will find yourself in losing positions that are quite scary, to be frank. Mainly, because in order to make money day trading, you have to buy a lot more shares just to get a good win for the day. And because the price movements that benefit can be in the pennies. The longer you hold positions for the day, the riskier the potential for losses. There will be money lost in day trader, so you have to have work towards increasing your ratio of gains versus losses.

With buy and hold strategy, a great stock will eventually go up in price and in time the profits will go up as well. You don’t have to just practice day trading or buy and hold, as you can do both if you manage your portfolio wisely.

Image by Nattanan Kanchanaprat from Pixabay

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randomguru

Portfolio Manager & Musician

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