There are many different ways to trade stocks and commodities on the financial markets. Over time, most investors develop a personal trading style that suits their goals and specific preferences. Two of the most popular and time-tested ways to trade are day trading and swing trading.
Day trading and swing trading both share some common techniques required for success, and each trading style has its own set of skills that must be mastered before an investor can become a proficient trader. They both demand, among other things, perseverance, concentration, and a level-headedness if success is to be achieved.
But what’s the difference between day trading and swing trading? And which approach is best for you?
What Is Day Trading?
Day trading gets its name from the fact that traders usually open and close their positions within the course of a single day, making sure not to hold any active trades overnight.
Day traders will normally make multiple trades in a single day, using technical analysis to identify patterns and price trends that offer profitable trading opportunities.
Many day traders will also make margin trades with capital borrowed from a broker, which adds a substantial element of risk to the practice.
Benefits Of Day Trading
Perhaps the most enticing aspect of day trading is its potential for investors to make unusually high profits.
For a trader with an iron discipline and a deep understanding of technical trading concepts, day trading offers the opportunity to make a lot of money in a very short space of time, especially when making leveraged trades.
It’s also very exciting. There’s no doubt that the adrenaline rush traders get from making split-second trading decisions in the heat of the moment is thrilling, as is the knowledge that they’re competing in a zero sum game with the rest of the market and other professional traders.
Day trading is also a great way to make a living for people who don’t want to be tied down to a stultifying corporate timetable, and who would rather set their own schedule and pace of work. While successful day trading does require time and concentration, it’s still possible for traders to work flexibly and take time off whenever they please.
Finally, day trading doesn’t require any formal qualifications or certifications, and thus has a rather low barrier to entry. That doesn’t mean that day trading is easy – far from it. The best day traders are always learning, and often update their skills and knowledge though courses and workshops.
However, since day traders are normally self-employed, they don’t need to go through the usual hiring process of attending stressful interview panels or proving their prerequisites with various degree certifications.
Drawbacks Of Day Trading
The single biggest issue for the lone day trader is the sophistication of the professional competition they face.
There are now well-capitalized hedge funds performing high-frequency trades, whose liquidity is so huge that they can temporarily alter the market in the process – making it almost impossible for a regular trader to predict certain price moves or market trends.
There’s also the phenomenon of the “quant” – a mathematical and statistical specialist who uses advanced modeling techniques to inform trading decisions, providing these traders with an edge that non-specialists can’t normally rival.
In a bid to keep up with their better equipped competition, day traders will also have to outlay a significant amount of cash to furnish themselves with a quality trading platform, a state-of-the-art computer, charting software to perform technical analysis with, and a subscription to a real-time quote service that provides direct live price feeds.
Additionally, day traders must also consider that they will be paying out higher-than-normal commission fees simply because they’ll be performing such a high volume of trades every day.
These unexpected costs must be accounted for before becoming a day trader, because day trading is a full-time job, and usually means leaving one’s old job – there are thus no other sources of income to cover these expenditures once a day trader begins their new occupation.
Ultimately, day trading is stressful, and not everyone is up to the pressures that the role imposes. The kind of focus and concentration that is required day after day can be relenting, and many traders often succumb to burnout further down the line.
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What Is Swing Trading?
Swing trading is a trading strategy that focuses on identifying price changes – or swings – in a commodity, stock or currency that typically occur over a period of days, sometimes weeks, or even months.
Swing trading is similar to day trading in as much as it is not a long-term investment methodology that rests on the intrinsic value of a asset; rather, it is a way to capitalize on short-term, temporary price trends that don’t necessarily reflect the long-term viability of owning that asset.
Benefits Of Swing Trading
Because swing trades take longer to complete, swing traders will normally make fewer trades per unit of time, incurring fewer commission fees as a result.
Also, leaving a trade open over a longer period of time can maximize profits by allowing a price to move its furthest, reaping larger returns compared to trading the same stock multiple times a day.
And where day traders must be in possession of a formidable set of technical skills, and own expensive trading software to manage their trades, swing trading, on the other hand, is comparatively much more simple.
No high-powered computing rig or specialist knowledge is required. Furthermore, swing trading is rarely ever a full-time pursuit, and traders can continue to work a regular job alongside their swing trading activities, meaning that they can offset any trading losses and not be reliant on their trading profits for income.
There’s also much less stress associated with swing trading too, since traders need not monitor their positions continually or stay focused for long periods of time, burnout is much rarer among swing traders than it is among their day trading counterparts.
Swing traders can also utilize stop-loss mechanisms to mitigate losses associated with trades that do not go as planned. While not being perfect in all trading scenarios, stop-loss orders do offer some level of insurance against unanticipated price movements.
Drawbacks Of Swing Trading
Just as swing trading can provide greater returns on individual trading positions, it can also lead to greater losses too – especially if traders do not use stop-loss precautions, as mentioned above.
Similarly, because swing traders make fewer trades overall, they’re also less likely to hit those big trading-wins as often as day traders do over the length of their trading career.
Swing traders are further disadvantaged when it comes to making margin trades too. Because swing traders hold positions for much longer than day traders, their leverage ratios are curtailed as well.
For instance, day traders can usually have margins four times that of their capital deposit, whereas swing traders can only borrow twice as much as the capital held by their broker.
Another problem with swing trading is that markets can make substantial moves overnight – catching swing traders completely by surprise, and giving them no time to respond. This isn’t just a problem with losses, either; some big profits can be missed if traders aren’t alert when the market shifts.
Again, stop-loss orders can help, but there are times when even these measures are insufficient; stop-loss orders only trigger a trade, they cannot guarantee what price the trade is executed at. And when a market moves dramatically, the price a trader gets could be significantly different to what was initially expected.
And lastly, an investor’s capital is tied up for longer in a swing trade than it is in a day trade, taking away the chance to react to other lucrative investment opportunities should the arise.
Swing Trading Vs Day Trading: Conclusion
As you can see, day trading and swing trading both have their own pros and cons attached to them. Neither is either better or worse – just different.
Ultimately, the best option will depend on your own circumstances and your own personality. Those with the required time, skills and discipline might be drawn to the thrill of day trading, whereas more risk-averse investors will prefer the looser, less frantic style of swing trading.
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