You want to trade and are weighing up swing trading vs day trading and which style is right for you. Perhaps you like the idea of day trading but are not sure of the time demands? Could swing trading fit better around your job and other life commitments? If you’re figuring it all out, we’ve got you covered.
I have a long career of trading, primarily as a swing trader but, for a period, I’ve also day traded. Before I started day trading, I loved the idea of it. The money I could earn was a big attraction but it was the freedom it would give me that I liked as well. The reality was different and so if you’re considering day trading, let me explain what’s involved.
But first, let’s understand the meaning of both trading styles.
Meaning of Swing Trading and Day Trading
Swing trading is a trading strategy that requires holding positions for several days or weeks hoping that momentum remains in their favor. Swing trading is less concerned with second-to-second price swings in a market and instead seeks to capture a fraction of a higher overall trend.
Swing traders do not have to spend their entire day staring at a computer screen. Swing traders will initiate their risk and reward targets and then let the position run on autopilot until it closes with a profit or a loss.
Swing traders aren’t seeking to make a million on a single trade. Swing traders pay lower transaction fees to their brokers than day traders since they open fewer positions.
Swing traders will maintain positions overnight, and if they’re trading Contracts for Difference (CFDs) or forex, for example, they’ll be liable to overnight funding charges.
Swing traders realize that no one trade will make or break their success so while their trading volume is lower than day traders, they also pay lower transaction fees to their broker.
While day trading, as the name suggests, entails making dozens of trades in a single day using technical analysis and advanced charting techniques.
The goal of a day trader is to make a living by trading stocks, commodities, or currencies and making small profits on frequent trades while limiting losses. Day traders do not often hold any assets or securities overnight.
Day traders generally seek more market volatility since it indicates that they may see more price movements in a shorter period, thereby presenting a higher possibility of profit. Markets are typically the most volatile between their formal open and close times.
Difference Between Swing Trading vs Day Trading
| Swing Trading | Day Trading |
|---|---|
| Place multiple trades over days or weeks | Place numerous trades in a single day |
| The cost of transactions is relatively low | The overall cost of transactions is high |
| Positions are held overnight | Positions are closed at the end of the day |
| Time spent monitoring the market is less | Time spent monitoring the market is higher as they watch tick to tick market movements |
| Enter fewer positions with higher gains or losses | Enter multiple positions with smaller gains or losses |
Time-Frequency: Swing Trading vs Day Trading
Swing traders engage in trades that last for multiple days, weeks, or even months. Day traders, on the other hand, open and close numerous positions in a single day. I’ve written about how emotionally draining this can be in My Story.
Transactions Placed: Swing Trading vs Day Trading
Swing trading is still a relatively fast-paced trading strategy, but it involves making trades over days, weeks, or months. As an outcome, swing trading accumulates profits and losses at a slower rate than day trading. On the other hand, certain swing trades can result in large gains or losses very rapidly.
Day trading might attract traders who want to compound their returns quickly. The word “day trading” refers to the practice of traders buying and selling securities on the same day, often multiple times per day.
Time Needed: Swing Trading vs Day Trading
Successful trading takes commitment, and both day trading and swing trading require time to develop a strategy and become consistent. That said, the point of day trading is to sit in front of your computer for hours at a time and, compared to swing trading, gives a poor Return on Investment – investment here is your time.
In comparison, swing trading can save time when it comes to active trading. For instance, when swing trading using a daily chart, you could find new trades and update stop orders on existing positions in less than an hour every night. You only need to enter orders for new trades if the strategy signals that should happen
If you place trades that last for several weeks or months, you may only need to look for trades and update orders once a week, reducing your time commitment to about an hour per week rather than per night.
Typically, day traders trade for at least two hours each day. When you factor in preparation time and chart/trading review, you’re looking at a minimum of three to four hours on the desktop. If you trade for more than a few hours a day, your time commitment increases dramatically, and trading becomes a full-time job.
How Effective is Swing Trading Compared to Day Trading?
Swing trading is a great way to begin your trading journey.
It allows you to develop a ‘feel’ for market movements, learn new trading strategies and design a trading system that is as compatible with you as you are with the system (I wrote an article for a partner publication on developing an edge. This compatibility can reduce stress and increase the likelihood of profit. Of course, your system needs to be followed consistently, with consistency, you’ll get consistent results.
Day traders must commit to changing market volatility and be quick with their trades, this can increase their stress levels which in turn can lead to mistakes in their decision-making.
Due to the fast pace and short windows of opportunity, day trading requires sustained focus for extended periods. Swing trading still requires concentration, but the time between actions, such as entering or exiting positions, is longer.
Both Swing traders and day traders both need to be well-capitalized, with enough money in their account to withstand losses and their own mistakes.
Why is Swing trading the Best Approach for Trading?
Swing trading is a trading method that focuses on capturing the bulk of a price over the short to medium term while keeping draw-downs to a minimum.
Swing trading positions are often kept for a few days to a few weeks, or even longer, the length of the price change dictates how long the trader holds a position for. This approach means that trading can be done around a full-time job and other life commitments.
What Strategies do Swing Traders Implement?
Swing traders try to profit from price changes between swing pivot points, also known as swing highs and lows. They can happen in long-term up or down trends or in range-bound markets. The fluctuations can last for days or even weeks. Each swing high or low is a swing pivot that acts as a temporary ceiling or floor for advances or declines in price.
The Exponential Moving Average (EMA) is useful in identifying the current trend direction but the EMA can also be used as a trading strategy in itself. The crossover strategy takes the trader long or short, joining the path of least resistance up or down.
Other strategies traders might use include trading breakouts above or below multi-day highs or lows. The Donchian Channel is an indicator that is an overlay on the price chart and which shows the trader where the multi-day highs or lows are. We have automated email alerts set up to flag how close markets are to their highs or lows.
Also, the Average True Range(ATR) can be used as a way of measuring risk, and the placement of the position’s stop-loss.
Summary
Day trading is often presumed to have higher profit potential, but it comes with a higher risk profile and is not for everyone.
While successful day traders are able to compound their returns quickly, the odds of success are extremely low. I’ve written before about how emotionally draining I’ve found day trading and the time commitments mean that this type of trading is not the best way for a beginner to start their career.
The truth is that only a small percentage of people succeed as day traders and make a living doing so and the reality is that flipping burgers in McDonald’s, would probably provide you with a higher income.
On the other hand, swing trading provides the time and space for the newer trader to find themselves and their strategy. It allows them to grow their account whilst working a full-time job. Trading is a life skill, once you have it, you’ve got it for life; you don’t ever ‘forget’ how to trade. Don’t rush to start trading full-time before you’re ready.