Swing trading and day trading are two popular ways of trading financial instruments such as stocks, forex, bonds and futures. Benzinga is here to introduce you to both types, helping you hone in on the one that best fits your trading style.
Overview: Day Trading vs. Swing Trading
Depending on your level of commitment and the amount of time you’d like to spend monitoring your money, your time horizon could vary considerably.
Let's take an in-depth look into the differences between the two types of trading that exist on the lower end of the time horizon spectrum, from a matter of hours to just days.
What is Day Trading?
Day trading refers to buying and selling financial instruments, such as stocks, currencies, or commodities, within the same trading day. Day traders aim to take advantage of short-term price fluctuations in order to make quick profits. They typically close out all of their positions by the end of the trading day and do not hold any positions overnight. Day trading requires active monitoring of the markets and making quick decisions based on technical analysis, market trends, and other indicators. It is a high-risk, high-reward trading strategy that requires knowledge, experience, and careful risk management.
What is Swing Trading?
Swing trading is a trading strategy that aims to capture short-term price movements in financial markets, such as stocks, currencies, or commodities. Unlike day trading, which involves buying and selling assets within a single trading day, swing traders hold their positions for a few days to several weeks.
Swing traders look for opportunities to enter trades based on technical analysis, using indicators and chart patterns to identify potential price reversals or trends. They aim to catch the "swings" or price movements that occur within a larger trend.
Swing trading requires careful analysis of market conditions, including studying price charts, monitoring volume, and considering market sentiment. Traders often set specific entry and exit points, using stop-loss orders to limit potential losses and take-profit orders to secure profits.
Compare Day Trading vs. Swing Trading
Whether day trading or swing trading is right for you is determined by the amount of time you can dedicate to trading, your goals and your financial needs.
You’ll accumulate gains and losses more slowly if you swing trade, but swing trades can also result in big gains.
Overall, day trading can make you money more quickly, but you can still make and lose money swing and day trading.
Here’s an example of day trading positive return:
- If you purchase 1,000 shares of a stock trading at $10, the total cost would be $10,010 ($10,000 for stock and $10 for commission).
- If you sell the stock for $11 per share, later on in the day (day trading) your earnings are $10,990 ($11,000 plus $10 commission), and your profit is $980 ($10,990 minus $10,010).
- If you did that all year, your annual return would be close to $250,000. Though a fictional scenario with similar results are unlikely, there is a tantalizing attraction to trading.
The longeryou hold a position, the less control you have over your results.
For example, if you hold a position for 10 minutes or an hour (day trading), you can control your risk much better than you could if you hold your position for a lengthier period of time (swing trading).
There are also major financial risks with both, as well. Check out day trading firms with your state securities regulator, be careful with margin accounts and be aware that unless you know what you’re doing, you could lose a lot of money.
Many experienced day traders recommend paper trading, or imaginary buys and sells with pretend money, before launching into either venture for real.
Full-Time Business Potential
The Securities and Exchange Commission (SEC) identified some rules and specific conditions to determine the circumstances under which active traders have a real trading business.
The rules and conditions focus on the substantial activity of trading seeking short term profits in a regular and continuous way. Special attention is given to the frequency of trades, the potential to produce substantial income to cover a lifestyle and expenses and the amount of time traders commit to trading activity.
Your Time Commitment Varies
The amount of time you commit to opening and closing positions is markedly different between day trading and swing trading.
Day trading requires more time monitoring trading conditions. Swing traders can monitor market conditions more quickly, in contrast with the hours spent doing so if you’re a day trader.
A day trader may choose to trade the open and the close of daily trading sessions, so the first one to two hours of the trading day and the last one to two hours as well.
A swing trader can only monitor the last ten minutes of the daily trading session to confirm that the trading conditions have not changed and to check the profits or losses of the open positions.
Trading Methods Are Different
You’ll benefit from different types of price swings (large or small) with each trading type.The main difference between these two trading methods is the frequency of trades.
Day trading is more active, in that you buy or short sell volatile stocks as required to take advantage of projected price movement, and day traders may make only one or a few trades during any given day.
Swing trading, on the other hand, may hold a position for a few days or even weeks to take advantage of larger price swings.
Technical analysis is important for both types of trading, but day traders usually employ more advanced charting techniques. They typically need to monitor important price levels and indicators for short term profits. A swing trader may also use technical analysis to determine the timing of trades, but the need to monitor trades each day is not as crucial.
Day traders also place importance on moving averages or overbought or oversold conditions for a few indicators and support or resistance price levels. Swing traders need to monitor all open positions at the close of the daily trading session, which can be done within a few minutes, in contrast with the hours required by day traders.
Pattern-Day Trading Isn’t a Concern for Both
Under FINRA rules, customers who are deemed “pattern day traders” must have at least $25,000 in their accounts and can only trade in margin accounts.
This does not apply for swing trading as there could be a significantly smaller amount of trades taken over time. FINRA rules define a “pattern day trader” as any customer who executes four or more “day trades” within five business days, provided that the number of day trades represents more than 6% of the customer’s total trades in the margin account for that same five business day period.
This rule represents a minimum requirement, and some broker-dealers use a slightly broader definition in determining whether a customer qualifies as a “pattern day trader.”
Start-Up Costs and Ongoing Expenses Differ
Day trading has higher start-up costs and ongoing expenses than swing trading. Costs include charts, online news feed, alerts and live price quotes. Swing trades can be made monitoring the daily charts once per day, with free charts, not during the whole daily trading session.
Choosing the Trading Strategy That's Right for You
Day trading is more suitable for investors who are not novice traders, have significant experience trading for several years and have the proper mentality to sustain intense stress levels from the daily volatility in the financial markets.
Swing trading is a more balanced way of trading, as it does not require constant monitoring of financial markets, and at the same time, it offers the potential for risk-adjusted trades with potential profitability. It’s not easy to claim that one trading activity is better than the other one. Each type of trading has its pros and cons.
The main factor to consider is how much time and effort you’re willing to commit to monitoring the stock market or other financial market sessions.
Frequently Asked Questions
Is it better to day trade or swing trade?
The choice between day trading and swing trading depends on an individual’s preferences, goals and risk tolerance. Day trading involves buying and selling securities within the same day, while swing trading involves holding positions for a few days to weeks. Day trading requires constant monitoring and quick decisions, while swing trading allows for more flexibility and requires less time commitment. The decision should be based on trading style, available time and willingness to take on risks.
Are day traders or swing traders more profitable?
The profitability of day trading versus swing trading is subjective and dependent on factors such as market conditions, strategies, risk management and individual skill levels. Day traders profit from short-term price fluctuations, while swing traders hold positions for longer periods to capture larger price movements. Success in either style relies on the trader’s ability to analyze the market, make informed decisions and manage risk effectively.
Should you start trading?
The decision to start trading depends on factors such as financial goals, risk tolerance and market knowledge. Trading can be profitable but comes with risks and challenges. It requires understanding, monitoring and informed decision-making. Research, education and guidance from experienced traders or advisors are recommended. Start with a small amount of capital and consider personal circumstances and goals.