Have you ever wondered whether day trading or swing trading is the best way for you to make money? Well, this swing trading vs day trading guide contains all the information and resources you need to answer that question.
We’ll look at what sets these two strategies apart, discuss their individual benefits, talk about how risk levels differ between them, and more.
What is Swing Trading?
The goal of swing trading is to identify stocks with momentum and hold onto those positions for several days or possibly weeks in order to benefit from price increases.
Sounds simple, right?
If only!
Unfortunately, prices don’t move in straight lines. Instead, they fluctuate with the ebbs and flows of economic cycles, business fundamentals, and market sentiment. As such, prices tend to move in a zig-zag fashion, creating a path of intermediate highs and lows, or “swings”.
True to their name, swing traders seek to capitalize on these “swings” by tactically dipping in and out of their peaks and troughs. In doing so, they aim to capture smaller parts of a longer-term trend.
The chart below shows what this looks like in practice. The buy and sell signals are plotted by a pattern trading system in MetaStock, which as you can see, does a pretty good job of spotting medium-term swings within the longer-term trend.
The Rahul Mohindar Oscillator is another effective swing trading system in MetaStock. Read my TC2000 review for a closer look at another good swing trading software.
Swing Trading Pros
- Less upfront costs – swing trading requires less initial capital than day trading. Full-time day traders require a minimum account balance of $25,000 and state-of-the-art software, while swing traders just need some money in a brokerage account
- Profit potential – Because of their longer holding period, swing traders can make more money on each trade than day traders
- Time commitment – swing traders have more time available to analyze potential investments and assess fundamentals like earnings reports or management teams’ performance
Swing Trading Cons
- Liquidity – swing trades are vulnerable to overnight and weekend risks, as you can’t liquidate your positions outside of market hours
- Short-term fluctuations – the swing trading strategy may miss out on gains from short-term fluctuations because it concentrates on longer-term trends
- Timing – it’s difficult to predict when a trend might stop
- Overnight costs – because swing traders hold positions overnight, they may have to pay overnight funding charges
For further information about swing trading, I would recommend this article by ChartMill.
What is Day Trading?
Day trading on the other hand involves taking multiple short-term positions in stocks throughout the course of one day.
Day traders look for small price movements that they can capitalize on by entering and exiting positions frequently during market hours. Because of the volatile nature of this form of investing, day traders need to be able to handle high levels of stress.
This trading style is much more active than swing trading, as it requires constant monitoring of the markets throughout the day and quick decision-making skills when making multiple trades.
Day traders focus on a handful metrics to spot trading opportunities, including:
And use state-of-the-art software like Trade Ideas to find the most volatile stocks throughout the trading day.
Day Trading Pros
- Fast-paced environment – day trading allow traders to benefit from quick changes in stock prices as they happen
- Potentially rewarding – those who are willing to take the time to learn the strategies and techniques involved with day trading, can make significant gains if successful
- More control – day traders have greater control over their investments as they are able to make decisions quickly when reacting to news events or changes in market sentiment
Day Trading Cons
- High risk – because day trading positions are held for such short periods of time, there is a high chance of losses due to sudden changes in stock prices
- Transaction costs – since trades occur frequently, transaction fees can add up quickly
- Inability to assess fundamentals – when making investment decisions in such a short time frame, day traders may not have the time to conduct fundamental analysis
Swing Trading vs Day Trading Differences
Here are the key day trading vs swing trading differences:
Trading Frequency
In order to profit from modest market gains, the day trading style generally opens and closes multiple positions quickly. Therefore, day traders execute many trades in a single day.
In comparison, swing traders place fewer long-term trades that last for days, several weeks, or even months. Swing traders must exhibit more patience than the day trading strategy, as they aim to profit over periods longer than a single day.
Time Horizon
A day trader can hold for a short period, a few minutes, or as long as a few hours without difficulty. While some day traders may carry positions over into the next day or two, most close out their positions before the market close that day.
On the contrary, a swing trader is bound by the length of the trend or swing. A swing trader might have to maintain their positions for days or perhaps weeks.
Time Commitment
Day trading tends to be a full-time job that involves continuous monitoring, analysis, and trading.
Conversely, swing trading has looser time constraints and is more flexible. It generally takes a couple of hours a day to stay on top of markets, monitor your positions, and conduct research for future trades.
Skillset
For a day trader, being successful depends on having a specific skill set. It requires you to make quick decisions in a highly stressful environment, so you need to be able to handle the adrenaline rush that comes with it.
Along with making split-second decisions, day traders must also have a strong understanding of technical analysis so they can predict where prices are heading next.
As well as having a grasp on technical analysis, swing traders also need to be proficient in fundamental analysis in order to accurately time market swing points.
Swing trading also requires more patience, as you need to allow time for your trade ideas to play out.
Key Differences Between Day & Swing Traders
The goal of day trading vs swing trading is to capitalize on small price movements during the day. This type of trading requires ample knowledge of how markets operate and an understanding of technical indicators that can help predict price movements in the near future.
Additionally, many day traders have access to extremely advanced software tools and platforms that can provide them with useful market data and insights.
Swing traders, on the other hand, focus on trends and often use technical analysis along with fundamental analysis when making decisions about whether or not to take a position in a given security. For those interested, TradingView allows you to perform both forms of analysis.
The swing trading style also holds positions that can last from days to weeks, whereas day traders open and close positions within the same trading day.
Ultimately, swing trading uses trends, momentum indicators, and trading strategies to identify potential entry and exit points, while day traders concentrate on shorter-term momentum, patterns, and technical analysis. This TradingView vs Trade Ideas review compares two of the best tools in the game for these trading styles.
How to Choose Between Swing Trading and Day Trading
Day trading is ideal for those who can dedicate time during market hours to constantly monitor their positions and react quickly to changing market conditions.
On the downside, day trading requires more knowledge of the markets than other strategies, as well as more time invested in researching potential trades each day.
So, if you’re looking for an active way to make money quickly off short-term fluctuations in stock prices, while closely monitoring markets during their most volatile times, then day trading may be for you.
Swing trading, on the other hand, involves holding onto a position for days or weeks at a time. Therefore, swing trading may be better suited for you if you’re looking for a more hands-off approach that allows you to gain long-term exposure to selected stocks over multiple days or weeks.
Ultimately, your choice comes down to your own preferences, circumstances, and goals.
The Bottom Line
Before jumping into swing trading vs day trading, it is important for investors to do their own research in order to make the most appropriate decision.
Both trading styles have their advantages and weaknesses, but only you can make the decision that’s best for you.
And remember. Regardless of what type of trading style you choose, there is no guarantee that you will benefit anytime soon.
Key Takeaways
- Day trading employs short-term buy and sell signals that rely on cutting-edge trading platforms and tools, whereas swing traders focus on trends, and use technical and fundamental analysis.
- While day traders seek to make small gains from many trades, swing traders aim to make larger gains from fewer trades.
- Swing trading employs trends and momentum indicators to identify short to medium-term trends, while day trading seeks to capitalize on small price movements during the day
- Individual traders must carefully consider when and how to approach the market, as both swing trading and day trading have their own advantages and drawbacks.
- It is important for traders to understand which of these two options best fits their goals before getting involved with either type of trading style.
- There is no guarantee that either trading style will be profitable in the long run.