Day trading and swing trading are two often confused terms representing two short-term strategies across different time periods. In this article, we will be comparing the underlying characteristics, advantages, disadvantages, and differences between the two.
What is Day Trading?
Day trading or intraday trading entails making dozens of trades on the same day, mainly based on technical analysis and complex charting systems. These trades may take place in any market, but the FX market is a popular choice due to the high liquidity that offers easy entry and exit.
Day traders seek to take advantage of fluctuations in asset prices within the day to general small profits on a high volume of trades, and usually do not hold on to any positions overnight.
Characteristics of Day Trading
Day traders need to be highly attuned to the market – they have to closely monitor news events and the resulting public sentiment that may cause price movement.
Events like war, natural disaster, or economic statistics, and fiscal policy releases come with many expectations even before and as they happen. These market movements are highly desirable for day traders, giving them the potential to profit off the price action.
The prediction of intraday price movement necessitates a deep understanding of both fundamentals in the markets traded and technicals to follow price movement. This has to be paired with fixed strategies and discipline to follow the parameters set, even if it means taking a loss.
This is extremely important as day traders often trade on margin to magnify profits off each trade. Some of the strategies employed include scalping, fading, arbitrage, momentum, and range trading.
Day trading can be extremely lucrative but carries immense risk. Hence, it is important for traders to build a strong understanding of markets and trading experience before even attempting to day trade to avoid any losses. Due to the time and focus needed, many who successfully day trade work on their craft full-time.
What is Swing Trading?
Swing trading involves traders holding on to a position over a period of time, typically from one day to even a few weeks in order to capture a large part of an expected price move.
Characteristics of Swing Trading
Trades are typically held over a longer period of time compared to day trading, in order to profit from an anticipated price move. This works out to the course of several days or weeks, but will usually not exceed months.
Swing traders hold their positions for longer periods than day traders, but also run the risk of substantial losses. In addition, margin requirements are higher and the maximum leverage is typically twice one’s capital. This is in contrast, with day trading where margins are usually four times one’s capital.
Differences between Swing Trading and Day Trading
Day traders open and close multiple positions within a single day. On the other hand, swing traders tend to take the same number of trades across several days or weeks.
Traders who adopt swing trading are looking to catch the longer time horizon swings, and may hold on to a position for weeks or up to months. This would require traders to be mentally ready to sit through drawdowns against their positions and use a larger stop loss/risk.
Day traders typically do not hold positions overnight, thus requiring traders to make snap buy and sell decisions.
Typically, swing trading needs far less capital, considerably less time, and does not require a special day trading platform from a broker. Furthermore, swing trading can be performed with much smaller lot sizes to start with and can be seen as a good starting point as one learns how to swing trade.
Due to its time frame, swing trading can be done part-time, while day trading requires a full-time commitment for the most part.
Fundamentally, swing trading boasts a lower risk factor as one has more time to consider all the trade parameters.
Day traders, while using state-of-the-art trading technology, have to deal with other algorithmic traders as new strategies and tools emerge, while developing an excellent understanding of order flow (e.g. bids and asks) and volume.
Although the same concept is imperative to swing traders, they are typically more concerned with the volume and order flow of the whole day.
With the above considerations and trading structure, day traders aim for lower profit targets on each trade. Although swing traders stand to make more with each trade, the volume at which a day trader trades can result in greater profit.
Key summarised pros & cons between Swing Trading and Day Trading
Swing Trading Pros
- Swing trading allows you to have a larger profit target based on longer-term price movements.
- Swing traders do not need to monitor the market as often as day traders.
Swing Trading Cons
- Price movements in swing trading may take a longer period of time to be observed.
- There is some overnight risk and swap fees that are sometimes included as part of holding positions over a longer period of time.
Day Trading Pros
- There is no overnight risk as traders sell everything within market hours, within the same day.
- Faster compounding of earnings that one can use the next day.
- Lesser capital is needed compared to swing trading.
Day Trading Cons
- Multiple trades within the day could potentially incur higher overall transaction costs.
- Traders would need to devote more time to day trading as close monitoring of price movements within the day is required.
Why might swing traders have an edge over day traders?
- Swing trading has less time pressure and allows traders to have ample time to adjust to evolving market environments and to make smart decisions.
- Swing traders can adopt both fundamental and technical analysis in making trade decisions, while most day traders rely largely on short-term reactions in market prices.
- Swing trading allows newbies more time to learn about trading through trial and error.
In summary, both day trading and swing trading have their own advantages and disadvantages. Traders should choose the approach that works best for their skills, preferences and lifestyles. The amount of time and resources that can be dedicated to trading should also be some of the factors considered when deciding which trading strategy is the most suitable.
Nonetheless, swing and day trading requires a good deal of work and knowledge to consistently generate profits with a sound trading plan which can be executed repeatedly.
The article is a part of our comprehensive Guide on Day Trading.