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February 07, 2023 8 min read

It’s impossible to miss out on trading trends if you actively use social media and the internet. A glance at your social feeds will show various mega- and micro-influencers promoting multiple trading platforms, applications, and courses.

The trading world has grown considerably over the past two decades. The internet has allowed retail investors to invest freely in financial markets, a luxury they weren’t previously afforded.

In addition, the internet has also made things easier for institutional and retail investors. It’s well-known that information dissemination has never been easier because the internet allows you to share information almost instantaneously with people from all across the globe.

Today, trading is more popular than ever, with traders opening and closing positions on various financial assets, including cryptocurrency, forex, stocks, and options.

Research shows that the number of day traders and swing traders considerably grew during the pandemic. It makes sense since people were cooped up in their homes with limited entertainment. In addition, many workplaces were forced to close their doors because COVID-19 significantly impacted their business model. These organizations struggled to pivot to a more profitable alternative in the pandemic-stricken age. It left people unemployed and looking for new avenues to generate money. As a result, they turned their attention to trading.

Stocks remain one of the most popular asset classes for trading. After all, everyone knows how volatile the stock market is. Traders have a different focus than investors.

It’s important to understand that trading is also called active investing. It might seem like a weird distinction from passive investing, but the reality is they are worlds apart. 

Passive investing is what people think of when talking about investing in a financial market. Let’s assume you have money to invest. You want to generate passive income. The stock market could be an excellent way to generate returns on your investment, especially as statistics show the stock market generally outperforms the inflation rate. It means your investment would likely stay safe even if inflation occurred.

You also wouldn’t be alone in considering the stock market as an excellent investment vehicle because most Americans think similarly. Research shows approximately 58 percent of Americans own stocks.

As a passive investor, you would identify a stock you like. Let’s assume you believe Tesla is destined for great things over the next decade. You would invest in Tesla’s stock and leave your investment untouched, except if the stock started to free-fall. You wouldn’t react to short-term price movements and fluctuations. Instead, you would focus on long-term gains. You would profit if you purchased Tesla’s stock for $200 apiece in 2023, and it appreciated to $350 apiece by 2030. Passive investors also receive dividends on their shares.

As a result, passive investing is markedly different from active investing.

While passive investors use fundamental analysis to find the right stocks, active investors rely on technical analysis.

Active investing differs from passive investing because it aims to capitalize on market movements. Everyone knows that financial markets are incredibly volatile. For instance, the stock market experiences severe volatility during the trading day. This volatility causes stock prices to fluctuate wildly throughout the trading day, often multiple times. Active investors try to time their trades so they can execute profitable trades.

Numerous different active investing strategies exist, and you’ve likely heard of them. Day trading and swing trading are both popular active investing strategies.


What is Day Trading?

Day trading is a highly popular active trading strategy. Day traders and swing traders have similar goals. They want to capitalize on the market’s price movements. However, how they approach their goals is vastly different.

Day traders don’t like to hold positions overnight. They often execute multiple trades. Day trading requires a significant time investment because their goal is to make small profits. However, they make up for it by sheer volume.

It’s also important to remember that since day traders don’t hold positions overnight, they open and close positions before the trading day ends. As a result, their positions have shorter time horizons than other active investing strategies.  

Day trading is often difficult for beginners because the SEC has minimum capital requirements. For example, day traders in the United States must have at least $25,000 in their margin account.

As a day trader, you’ll want to know when to open and close positions. Similarly, you’ll also want to know the price points for profitable entries and exits. That’s where technical analysis becomes crucial. Day traders will use trading chart patterns and other technical indicators when trading options, stocks, and other assets.

What is Swing Trading?

Swing traders, like day traders, also want to capitalize on market movements to maximize their returns. However, swing traders operate on a longer time-frame than day traders. For starters, they’re not as averse to overnight risk, which means swing traders will often hold positions for weeks or even months. Hence, their positions have a longer time horizon than day traders.

Swing traders also don’t have to invest as much time as day traders because their positions don’t require observing the markets as frequently. In addition, they also make fewer trades than day traders. While day traders make numerous trades per day, swing traders only make a few trades per day or week.  

The Pre-Requisite for Successful Trading

A well-thought-out trading plan is a prerequisite for successful trading. You cannot expect to be a successful trader without a trading plan. Trading is a complicated and intricate process. People often think they can blindly start making trades off intuition or based on what passes the eye test. But that’s not how successful traders operate.

You often hear the story of a trader trying their best to generate sizable returns. They’ll hit the jackpot by having a few trades go their way. However, things noticeably change within a short period. Suddenly, their trades aren’t working out as anticipated. One loss turns into another. Soon, the trader becomes obsessed with recouping their losses. They believe they can turn things around. But the reality is that these traders let emotions cloud their judgment. They’re no longer thinking rationally. Instead, they’re gambling with their capital. You want to avoid this situation at all costs.

A trading plan can help you avoid such problems. A trading plan is crucial for your success because it systematically defines how you’ll carry out your trading strategies. A good trading plan will be based on your trading strategy. For instance, a day trader]’s and a swing trader’s trading plans will vary differently. In addition, your trading plan will also vary based on your goals. For example, a day trader aiming to make enough returns to invest in real estate will have a different trading plan than a trader looking to make day trading their monthly income stream.

A well-devised trading plan includes multiple variables, including time, risk, and objectives. It also outlines how and when a trader will find positions, how they’ll manage these positions, their risk tolerance, etc.

The United States Securities and Exchange Commission (SEC) also recommends the importance of creating a well-thought-out trading plan before opening or closing positions. Similarly, most experienced traders echo similar sentiments, arguing that you’re putting your hard-earned money at risk by trading without a trading plan.

As previously mentioned, a trading plan also includes risk management principles. These principles are important because they ensure traders don’t wipe out all their trading capital with a single poor trade. It’s widely acknowledged that trades don’t always work out as anticipated. However, what happens if you stake all your trading capital on a single trade and the trade moves unfavorably? You’ll lose everything in your account, meaning you’ll have no capital to trade with any longer. Risk management principles aim to prevent such things from happening.

Most traders recommend incorporating the one or two-percent rule in your trading plan. This rule states that traders only invest one or two percent of their trading capital into a single trade. Let’s assume you have $10,000 in your trading account. You’ll want to refrain from investing more than $100 or $200 in a single trade. Following this rule can save your trading capital from being wiped out due to unforeseen circumstances.

Traders creating a trading plan

Tips for Successful Trading

Here are some tips to help you become a successful trader:

Always Back-test Your Trading Strategies

Back-testing your strategies is crucial because it prevents you from taking significant losses. Back-testing is a practice that involves applying your trading strategies against historical market data to determine their viability. Once you’ve created a plan and back-tested it, you can use it in the real financial markets with your trading capital at risk.

Consider Trading a Business

It’s important to consider trading a business instead of a hobby if you wish to succeed. You won’t have a real commitment to learning new strategies and absorbing different ideas if you approach trading as a hobby. Similarly, avoid treating it like a job because you’ll get frustrated quickly, especially since trading won’t yield a regular paycheck. Some months will provide better results than others.

Hence, most trading experts recommend treating it as a business. Businesses incur expenses, taxes, losses, uncertainty, risks, etc. You’ll encounter the same problems as a trader.  

Utilize Technology

Trading is complex and intricate. You must understand that other traders view you as their competition. They’ll be leveraging technology to ensure they can make the most calculated and profitable trading decisions.

As previously mentioned, you must use back-testing for the best results. Otherwise, you’ll be putting your hard-earned money at risk. Similarly, also consider using different charting platforms to analyze markets. You’ll also want to utilize technology to get market updates via your smartphone. You can subscribe to RSS feeds and use applications that allow you to track stocks, cryptocurrencies, forex, or other financial assets. It’ll significantly improve your trading performance.

Continue Learning

Financial markets are always changing and evolving. It’s important to understand that successful trading requires continuously learning how markets work and develop. You don’t want to act as if you’ve mastered the art of trading because the reality is you haven’t. Even the most successful traders understand that trading is a complex endeavor. There is much to learn.

Risk Only What You Can Afford to Lose

As previously mentioned, risk tolerance varies for everyone. Some traders might have a higher risk tolerance than others. However, risk management is crucial. Most traders are often so obsessed with chasing profits that they overlook the importance of preserving their capital.

You must ensure you protect your trading capital. Your trading plan should have well-defined risk management principles that you follow.  

In addition, some traders often make the mistake of using money earmarked for other purposes as their trading capital. Refrain from using money that was supposed to be used to pay the mortgage or allocated for your children’s tuition.  

A trader observing market fluctuations

Always Have a Stop Loss

The importance of a stop-loss order cannot be overstated. Every trade carries some inherent risk, especially if it doesn’t move as anticipated. A stop loss limits a trader’s risk exposure. Let’s assume you purchased XYZ Company’s shares at $30 because you believed these shares would appreciate in the future. Ideally, things would work out as planned. However, you would want to set a stop loss to protect yourself from the worst-case scenario. What would happen if the share’s price dropped to $15? You would lose a lot of money.

A stop-loss order allows you to minimize your losses by exposing yourself to a predetermined amount of risk that you’re comfortable accepting. For instance, you would limit your losses if you set a stop-loss order for $27. This order would mean that your broker would sell your shares, and you would exit that position by only accepting a $3 loss per share.

A trading chart pattern

Get Started with Trading Alphas

Getting started in options trading can be challenging for new traders. Fortunately, that’s where Trading Alphas can help. The company operates one of the best options trading Discord servers. In addition, Trading Alphas has a diverse community of over 1000 traders who have made over $25 million in profits.  

Consider checking out our website for more information. You can also contact us to learn more or sign up as a member today.