When it comes to buying and selling stocks or cryptocurrency, there are two main strategies: be a day trader or buy and hold (sometimes referred to as HODL in the cryptocurrency world, which stands for “Hold On for Dear Life”).
Which one you should do is entirely up to you since both can be profitable trading tactics. However, you should consider a few things before you make this decision.
This post will help you to figure out which approach will be better for you and your personal preferences.
High Risk Appetite
A major factor to consider is your portfolio risk. Day trading is considered to be a much riskier investing strategy compared to buying and holding. Strict day trading generally applies to the stock market since there are actual hours to the trading day and the market closes each night, weekends and holidays.
A strict day trader will open and close positions during the same market day – everything purchased each day will be sold before the market closes. This ensures that there is ongoing capital to trade with each day, but individual days can have major swings in either direction. If you are looking to make big gains quickly and can handle losing your entire investment, this approach may work for you.
A more informal version of day trading can mix the two main strategies together. The general idea here is to attempt to make day trades. However, if the market turns against your positions, don’t sell at the end of the day – continue to hold until the prices go up so you can make a profit on each trade.
This approach also has risks since there’s no guarantee that prices will ever go back up, and it can also tie up your investing capital that can prevent you from making additional trades. However, if you are careful with this tactic and avoid investing too large of a percentage of your total funds on any given day, you can reduce the risk of locking up a large portion of your funds in assets while you wait for a price recovery.
Low Risk Appetite
Buying and holding is considered a lower risk of investing as long as you’re willing to keep your purchases for years or possibly even decades. The idea behind this entire strategy depends on one key factor though – you MUST purchase assets that have a strong future and be willing to bail if the outlook of a company turns and likely won’t recover.
Assets and at least the overall market have traditionally appreciated in value as time passes. Markets do shift over time though, so if you choose to invest in individual companies then you will need to keep an eye on your investments and be willing to make changes when new technologies emerge or when people make drastic changes to their normal way of life. If you don’t want to monitor the markets you invest in then you should consider index funds.
Reason and Timeline for Investing
Why exactly do you invest and what kind of account are you using? Are you looking to make some extra spending money each year or are you saving for retirement? Your answers to these questions can alter your trading strategies. Normal brokerage accounts can receive deposits and withdrawals as often as you’d like and anything you make from this type of account is treated as annual income. If you’re interested in making extra cash to spend then this type of account is best – many day traders will use these accounts since it allows them to cash out profits to be able to live on that income.
Since markets have historically always risen over time, if you are investing for retirement then your best bet is usually to buy and hold stocks or even cryptocurrency for a long time. You won’t be worried about daily ups and downs in the market since you are interested in the market appreciating in value over time. This is a much less stressful method of investing as long as you ignore the daily fluctuations and only invest in assets that have a strong future potential.
In general, you can’t really make regular spending cash unless you day trade or invest in dividend stocks that will provide regular payments. Long-term holding doesn’t really mix with selling and cashing out profits, but you can employ a loose day trading approach that doesn’t require you to sell all purchases before the markets close. However, keep in mind that selling stock does come along with tax liability in the USA.
Daily Availability and Free Time
How much free time you have each day and how involved do you want to be with your investments are also major factors when picking a trading strategy. If you’re already very busy and don’t really have the time to watch your investments every day, you should focus on a long-term strategy to buy and hold. This allows you to set and forget about your portfolio, and it can even be set up to automatically receive new funds from you each month to increase your investments on a regular basis, which is something that is excellent to use for retirement accounts.
If you are the type of person that wants to try to take advantage of daily market price fluctuations and you have a lot of spare time every day then day trading may be better for you. When you buy and hold long-term, you don’t really want to keep an eagle eye on your investments each day since you’re more likely to sell during a major price drop that way.
Stock market day trading can be a tough job or even as a hobby, but cryptocurrency day trading can be even more stressful. Stock markets open and close each day and give you days off. Crypto never sleeps and doesn’t even take holidays. Day traders that don’t close their positions each day can struggle with crypto since they can’t watch their investments while they sleep. This can lead to major stress or even a lack of sleep, so approach day trading crypto with caution and consider a strict day trading policy so you can sleep or even take time off without worrying.
Day Trading for a Living
Overall, I would highly recommend against trying to day trade for a living, especially if you are a beginner to investing. Many people have very quickly lost a lot of money attempting this exact same thing. If you are extremely experienced and have spent years trading, you may feel confident enough to give it a try, but you’re also much more likely to take precautions if you have many years of experience.
One thing you want to avoid is risking your entire investment fund on a single trade or even on a single day. No matter how great you are at making picks, you WILL have bad days and even some very bad days on the market, so you can’t risk one of these wiping you out or even severely crippling your trading bank. Begin with trading a low percentage of your total fund each day and slowly increase as you get more comfortable.
Another key to successful day trading as your job is avoiding locking up too much of your funds. If you do not strict day trade and hold positions overnight, you can gradually begin to notice that a larger portion of your total bank is locked up in trades waiting to make a profit so you can sell. If you lock up too much, you’ll drastically increase your risk and decrease your daily earning potential since you’ll have less funds to use for new trades. Limit your daily trading amounts and even limit yourself on overnight holds to avoid this problem.