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Day Trading vs. Swing Trading: What’s the Difference?
Day Trading vs. Swing Trading: An Overview
Active traders often group themselves into two camps: the day traders and the swing traders. Both seek to profit from short-term stock movements (versus long-term investments), but which trading strategy is the better one? Here are the pros and cons of day trading versus swing trading.
Day trading involves a very unique skill set that can be difficult to master. Investopedia’s Become a Day Trader course provides an in-depth overview of day trading, complete with more than five hours of on-demand video. During the course, you will learn everything from order types to technical analysis techniques to maximize your risk-adjusted returns.
Day trading, as the name suggests, involves making dozens of trades in a single day, based on technical analysis and sophisticated charting systems. The day trader’s objective is to make a living from trading stocks, commodities, or currencies, by making small profits on numerous trades and capping losses on unprofitable trades. Day traders typically do not keep any positions or own any securities overnight.
The biggest lure of day trading is the potential for spectacular profits. But this may only be possible for the rare individual who possesses all the necessary traits, such as decisiveness, discipline, and diligence, required to become a successful day trader.
The U.S. Securities and Exchange Commission (SEC) points out that “days traders typically suffer financial losses in their first months of trading, and many never graduate to profit-making status”. While the SEC cautions that day traders should only risk money they can afford to lose, the reality is that many day traders incur huge losses on borrowed monies, either through margined trades or capital borrowed from family or other sources. These losses may not only curtail their day trading career but also put them in substantial debt.
The day trader works alone, independent from the whims of corporate bigwigs. He can have a flexible working schedule, take time off whenever needed, and work at his own pace, unlike someone on the corporate treadmill.
Day traders have to compete with high-frequency traders, hedge funds, and other market professionals who spend millions to gain trading advantages. In this environment, a day trader has little choice but to spend heavily on a trading platform, charting software, state-of-the-art computers, and the like. Ongoing expenses include costs for obtaining live price quotes and commission expenses that can add up because of the volume of trades.
Long-time day traders love the thrill of pitting their wits against the market and other professionals day in and day out. The adrenaline rush from rapid-fire trading is something not many traders will admit to, but it is a big factor in their decision to make a living from day trading. It’s doubtful these kinds of people would be content spending their days selling widgets or poring over numbers in an office cubicle.
To really make a go at it, a day trader must quit his day job and give up his steady monthly paycheck. From then on, the day trader must depend entirely on his own skill and efforts to generate enough profit to pay the bills and enjoy a decent lifestyle.
Day trading is stressful because of the need to watch multiple screens to spot trading opportunities, and then act quickly to exploit them. This has to be done day after day, and the requirement for such a high degree of focus and concentration can often lead to burnout.
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For many jobs in finance, having the right degree from the right university is a prerequisite just for an interview. Day trading, in contrast, does not require an expensive education from an Ivy League school. While there are no formal educational requirements for becoming a day trader, courses in technical analysis and computerized trading may be very helpful.
- Day trading, as the name suggests, involves making dozens of trades in a single day, based on technical analysis and sophisticated charting systems.
- Swing trading is based on identifying swings in stocks, commodities, and currencies that take place over a period of days.
- Neither strategy is better than the other, and traders should choose the approach that works best for their skills, preferences, and lifestyle.
Swing trading is based on identifying swings in stocks, commodities, and currencies that take place over a period of days. A swing trade may take a few days to a few weeks to work out. Unlike a day trader, a swing trader is not likely to make trading a full-time career, though a trader might choose to be a day trader AND a swing trader.
Anyone with knowledge and investment capital can try swing trading. Because of the longer time-frame (from days to weeks as opposed to minutes to hours), a swing trader does not need to be glued to his computer screen all day. He can even maintain a separate full-time job (as long as he is not checking trading screens all the time at work).
Trades generally need time to work out. Keeping a trade for an asset open for a few days or weeks may result in higher profits than trading in and out of the same security multiple times a day.
Since swing trading usually involves positions held at least overnight, margin requirements are higher. Maximum leverage is usually two times one’s capital. Compare this with day trading where margins are four times one’s capital.
The swing trader can set stop losses. While there is a risk of a stop being executed at an unfavorable price, it beats the constant monitoring of all open positions that are a feature of day trading.
As with any style of trading, swing trading can also result in substantial losses. Because swing traders hold their positions for longer than day traders, they also run the risk of larger losses.
Since swing trading is seldom a full-time job, there is much less chance of burnout due to stress. Swing traders usually have a regular job or another source of income from which they can offset or mitigate trading losses.
Swing trading can be done with just one computer and conventional trading tools. It does not require the state-of-the-art technology of day trading.
Day trading and swing trading each have advantages and drawbacks. Neither strategy is better than the other, and traders should choose the approach that works best for their skills, preferences, and lifestyle. Day trading is better suited for individuals who are passionate about trading full time and possess the three Ds: decisiveness, discipline, and diligence (prerequisites for successful day trading).
Day trading success also requires an advanced understanding of technical trading and charting. Since day trading is intense and stressful, traders should be able to stay calm and control their emotions under fire. Finally, day trading involves risk—traders should be prepared to sometimes walk away with 100 percent losses.
Swing trading, on the other hand, does not require such a formidable set of traits. Since swing trading can be undertaken by anyone with some investment capital and does not require full-time attention, it is a viable option for traders who want to keep their full-time jobs, but also dabble in the markets. Swing traders should also be able to apply a combination of fundamental and technical analysis, rather than technical analysis alone.
Day Trading vs Swing Trading
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The time frame on which a trader opts to trade can have a significant impact on trading strategy and profitability. Day traders open and close multiple positions within a single day, while swing traders take trades that last multiple days, weeks or even months. These two different trading styles can suit various traders depending on the amount of capital available, time availability, psychology, and the market being traded.
One trading style isn’t better than another and it really comes down to which style suits a trader’s personal circumstances. Some traders opt to do one or the other, while others may be day traders, swing traders, and buy-and-hold investors all at once.
Day Trading Versus Swing Trading: Potential Returns
Day trading attracts traders looking for rapid compounding of returns. Assume a trader risks 0.5% of their capital on each trade. If they lose, they’ll lose 0.5%, but if they win they’ll make 1% (2:1 reward-to-risk ratio).
Also, assume they win 50% of their trades. If they make six trades per day, on average, they will be adding about 1.5% to their account balance each day, less trading fees. Making even 1% a day would grow a trading account by more than 200% over the course of the year, uncompounded.
On the flip side, while the numbers seem easy to replicate for huge returns, nothing’s ever that easy. Making twice as much on winners as you lost on losers, while also winning 50% of all the trades you take, doesn’t come easily. You can make quick gains, but you can also rapidly deplete your trading account through day trading.
Swing trading accumulates gains and losses more slowly than day trading, but you can still have certain swing trades that quickly result in big gains or losses. Assume a swing trader uses the same risk management rule and risks 0.5% of their capital on each trade with a goal of trying to make 1% to 2% on their winning trades.
Assume they earn 1.5% on average for winning trades, losing 0.5% on losing trades. They make six trades per month and win 50% of those trades. In a typical month, the swing trader could make 3% on their account balance, less fees. Over the course of the year, that comes out to about 36%, which sounds good but offers less potential than a day trader’s possible earnings.
These example scenarios serve to illustrate the distinction between the two trading styles. Altering the percentage of trades won, the average win compared to average loss, or the number of trades, will drastically affect a strategy’s earning potential.
As a general rule, day trading has more profit potential, at least on smaller accounts. As the size of the account grows it becomes harder and harder to effectively utilize all the capital on very short-term day trades.
Day traders may find their percentage returns decline the more capital they have. Their dollar returns may still go up, since making 5% on $1 million equates to much more than 20% on $100,000. Swing traders have less chance of this happening.
Varying Capital Requirements
Capital requirements vary according to the market being trading. Day trading and swing traders can start with differing amounts of capital depending on whether they trade the stock, forex, or futures market.
Day trading stocks in the US requires an account balance of at least $25,000. No legal minimum exists to swing trade stocks, although a swing trader will likely want to have at least $10,000 in their account, and preferably $20,000 if looking to draw an income from trading.
To day trade the forex market, no legal minimum exists, but it is recommended that traders start with at least $500, but preferably $1,000 or more. To swing trade forex, the minimum recommended is about $1,500, but preferably more. This amount of capital will allow you to enter at least a few trades at one time.
To day trade futures, start with at least $5,000 to $7,500, and more capital would be even better. These amounts depend on the futures contract being traded. Day trading some contracts could require much more capital, while a few contracts, such as micro contracts, may require less.
To swing trade a variety of futures contracts, you need at least $10,000, and likely $20,000 or more. The amount needed depends on the margin requirements of the specific contract being traded.
Trading Times Differ
Both day trading and swing trading require time, but day trading typically takes up much more time. Day traders usually trade for at least two hours per day. Adding on preparation time and chart/trading review means spending at least three to four hours at the computer, at a minimum. If a day trader opts to trade for more than a couple hours a day, the time investment goes up considerably and it becomes a full-time job.
Swing trading, on the other hand, can take much less time. For example, if you’re swing trading off a daily chart, you could find new trades and update orders on current positions in about 45 minutes a night. These activities may not even be required on a nightly basis.
Some swing traders, taking trades that last weeks or months, may only need to look for trades and update orders once a week, bringing the time commitment down to about an hour per week instead of per night, or updating orders may not even be required on a nightly basis.
You must also do day trading while a market is open and active. The most effective hours for day trading are limited to certain periods of the day. If you can’t day trade during those hours, then choose swing trading as a better option. Swing traders can look for trades or place orders at any time of day, even after the market has closed.
Swing traders are less affected by the second-to-second changes in the price of an asset. They focus on the bigger picture, typically looking at daily charts, so placing trades after the market closes on a particular day works just fine. Day traders make money off second-by-second movements, so they need to be involved while the action is happening.
Focus, Time, and Practice
Swing trading and day trading both require a good deal of work and knowledge to generate profits consistently, although the knowledge required isn’t necessarily “book smarts.” Successful trading results from finding a strategy that produces an edge, or a profit over a significant number of trades, and then executing that strategy over and over again.
Some knowledge on the market being traded and one profitable strategy can start generating income, along with lots and lots of practice. Each day prices move differently than they did on the last, which means the trader needs to be able to implement their strategy under various conditions and adapt as conditions change.
This presents a difficult challenge, and consistent results only come from practicing a strategy under loads of different market scenarios. That takes time and should involve making hundreds of trades in a demo account before risking real capital.
Choosing day trading or swing trading also comes down to personality. Day trading typically involves more stress, requires sustained focus for extended periods of time and takes incredible discipline. People that like action, have fast reflexes, and/or like video games and poker tend to gravitate toward day trading.
Swing trading happens at a slower pace, with much longer lapses between actions like entering or exiting trades. It can still be high stress, and also requires immense discipline and patience.
It doesn’t require as much sustained focus, so if you have difficulty staying focused, swing trading may be the better option. Fast reflexes don’t matter in swing trading as trades can be taken after the market closes and prices have stopped moving.
Day trading and swing trading both offer freedom in the sense that a trader is their own boss. Traders typically work on their own, and they are responsible for funding their accounts and for all losses and profits generated. One can argue that swing traders have more freedom in terms of time because swing trading takes up less time than day trading.
A Final Comparison
One trading style isn’t better than the other; they just suit differing needs. Day trading has more profit potential, at least in percentage terms on smaller-sized trading accounts. Swing traders have a better chance of maintaining their percentage returns even as their account grows, up to a certain point.
Capital requirements vary quite a bit across the different markets and trading styles. Day trading requires more time than swing trading, while both take a great deal of practice to gain consistency. Day trading makes the best option for the action lovers. Those seeking a lower-stress and less time-intensive option can embrace swing trading.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
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