When Day Traders Don’t Close Positions at the End of the Day - dummies

When Day Traders Don’t Close Positions at the End of the Day

By definition, day traders only hold their investment positions for a single day. Closing out at the end of the day is important for a few reasons:

  • Closing out daily reduces your risk of something happening overnight.

  • Margin rates — the interest rates paid on money borrowed for trading — are low and in some cases zero for day traders, but the rates go up on overnight balances.

  • It’s good trade discipline that can keep you from making expensive mistakes.

But like all rules, the single-day rule can be broken and probably should be broken sometimes.

When day traders become swing traders

Swing trading involves holding a position for several days. Some swing traders hold overnight, while others hold for days or even months. The longer time period gives more time for a position to work out, which is especially important if the position is based on news events or if it requires taking a position contrary to the current market sentiment.

Although swing trading gives traders more options for making a profit, it carries some risks because the position can turn against you while you are away from the markets.

A tradeoff always exists between risk and return. When you take more risk, you do so in the hopes of getting a greater return. But when you look for a way to increase return, remember that you have to take on more risk to do it.

Swing trading requires paying attention to some basic fundamentals and news flow. It’s also a good choice for people who have the discipline to go to bed at night instead of waiting up and watching their position in hopes that nothing goes wrong.

Day trading becomes week trading

A position trader holds a stake in a stock or a commodity for several weeks and possibly even for months. This person is attracted to the short-term price opportunities, but he also believes that he can make more money holding the stake for a long enough period of time to see business fundamentals play out. Position trading increases the risk and the potential return because a lot more can happen over months than minutes.

Day traders also invest

An investor is not a trader. Investors do careful research and buy a stake in an asset in the hopes of building a profit over the long term. It’s not unusual for investors to hold assets for decades, although good ones sell quickly if they realize that they’ve made a mistake or if the story changes. (They want to cut their losses early, just as any good trader should.)

Investors are concerned about the prospects of the underlying business. Will it make money? Will it pay off its debts? Will it hold its value? They view short-term price fluctuations as noise rather than as profit opportunities.

Many traders pull out some of their profits to invest for the long term (or to give to someone else, such as a mutual fund manager or hedge fund, to invest). Doing so is a way of building financial security in the pursuit of longer goals. This money is usually kept separate from the trading account.