The Difference Between Swing Trading and Day Trading
Published December 30, 2021.
"Swing traders vs. day traders."
That is the question for beginner and expert investors alike who are getting actively interested in stocks and forex markets. Both styles are essentially different trading methods, but choosing which one to embrace might depend on how active you are or plan to be in your investment endeavors.
Before you select your journey, it would be best to first become acquainted with these trading styles. This article will cover the basics of swing trading and day trading, their benefits, pros and cons, and how to decide between the two.
What Is Day Trading?
Day trading involves buying and selling stocks multiple times throughout one session, with most of the trades occurring during the most volatile portion of the trading day: The first two hours.
For example, you launch a new position of a stock or ETF at the opening bell, and you can either go in and out of the position or sell it just before the closing bell.
What Is Swing Trading?
In the world of zero-commission trading platforms and a library of resources, many armchair traders have embarked upon swing trading for a living, which could certainly be a less risky alternative to day trading.
In short, swing trading consists of entering positions that occur for a couple of days to a few months so that investors can profit from an expected move in prices.
But what does a swing trade mean? The best way to determine it is with an example.
So, you may see a stock or notice an exchange-traded fund (ETF) that is routinely hitting bottoms on the chart of your choosing. However, with certain trends forming in the broader market, you believe there might be an upside coming soon. So, you buy the dips and hold them for some time until the security rises. This is known as a swing trade in stocks.
Similarities Between Swing Trading and Day Trading
The chief similarity between swing trading and day trading is that you are partaking in short-term investing rather than holding onto a security for over a year. Additionally, traders can swing trade and day trade in the same markets, including:
There is no rule prohibiting investors (even novice day traders) from taking advantage of swings in stocks, commodities, forex, or ETFs via swing trading or day trading. The choice is entirely yours.
Key Differences Between Swing Trading and Day Trading
Despite some of the similarities, there are many differences between the two trading methods.
How often do you trade?
Swing trading: A few times per week Day trading: Every day the market is open
How many trades do you make?
Swing trading: Multiple per week Day trading: Multiple per day
How long do you hold onto a security?
Swing trading: Weeks or months Day trading: End of the trading session/day
How can you execute trades?
Swing trading: Brokerage account Day trading: Trading software
Pros and Cons of Swing Trading
- Less time to trade
- Maximise short-term profits
- Simplified trading process
- Less risk
- No PDT rule
- Overnight and weekend risk
- Missed potential long-term gains
Pros and Cons of Day Trading
- Take advantage of volatile opportunities
- No overnight or weekend risk
- Instant results
- Requires lots of dedication
- Requires high minimum capital
- Adherence to PDT rules
Swing Trading Risks
When swing trading, you are always potentially too late to the rally. This might cause you to suffer a decreasing share price, especially if you are holding the stock overnight and you cannot sell until the opening bell on Monday. Indeed, when there is immense market volatility, the risk to realistic swing trading returns can be heightened.
For example, if you are buying a tech stock on a Wednesday with plans to sell it on Monday, you could lose your profits if something unexpected happens, such as a new government being launched into the company's practices. At the same time, if you sell too early, you risk losing even bigger gains if an avalanche of retail traders suddenly pours into the security.
Day Trading Risks
Since profit margins are thin for day trading, you need to time the market, which is already a challenge. In order to make this venture an economically successful one, you might need to leverage or borrow capital every day, which comes with its own series of risks that could ruin you.
Also, depending on your broker, you may be susceptible to vast transaction costs, including taxes and fees, that could eat away at your profit levels without you realizing. Your knowledge of charts, technical analysis, and the overall market needs to be exceptional to succeed. Of course, there are just some things that you can never anticipate or expect with the financial markets.
Where a Trader’s Experience May Come Into Play
Is swing trading profitable?
Can you earn a living from day trading?
The answer to both questions is a resounding yes!
With swing trading, you can execute a few trades per week, but you need to enter and close multiple trades a day. Or, to differentiate between the two, you can realize short-term gains with day trading, but you risk losing on additional profits by getting out of your swing trade too early.
Ultimately, if you wish to succeed in either field, your experience will play a big role. Over time, you develop a knack for how an index, stock, commodity, or currency pair will perform on any given session. Be it shareholders taking profits or how a business will respond to specific news, your skill and know-how will be critical to swing trading for a living or making day trading a critical component of your portfolio. There are benefits of swing trading and day trading alike, it's up to you to decide which avenue you want to pursue.
Come up with a sizable amount of capital, develop a strategy, and stick to your price points no matter what.