Let’s begin with understanding the different trading styles.
The major difference between the two trading styles depends on investment, time, and commitment. Different traders select different trading methods depending on time, capital availability, and psychology.
Day Trading
The Financial Regulatory Authority (FINRA) has described day traders as those who make frequent ‘round trips’, at least four such transactions in five days. Day trading is perhaps the most common trading style. Most traders are day traders who profit from the price movement in the market during the day. As the name suggests, all-day trading happens within a day. Traders open several positions during trading hours and close them all by the end of the day.
Day traders depend on technical analysis and software for dynamic updates. They are often full-time traders and follow the market closely for profit opportunities. Day trading offers more profit opportunities, at least in percentage in small trading accounts. They don’t look for big profit from a single trade. Instead, make several transactions to achieve their profit target.
To summarise, day trading is high-frequency trading, involving small amounts where buying price of the stock is always lower than the selling price.
Swing Trading
The main difference between day and swing trading is the duration. Swing trading can last over days or weeks. Swing traders wait for a pattern to emerge before executing a trade. They aren’t full-time traders; instead, they combine both fundamental and technical analysis to identify emerging trends and trade along with it. They would look for stocks with maximum profit potential within a short period of time. It involves higher risk but also higher profit opportunity.
We can more easily understand swing trading with the following key parameters.
- • Swing trading is halfway between trend trading and day trading. Sometimes a swing trade can last for 2-3 weeks before the market condition gets right
- • Swing traders will hold their position at least overnight before squaring off
- • Swing traders blend both fundamental and technical analysis to identify stocks with profit potential
- • Usually, fundamental traders are swing traders because it usually takes a least a week for corporate news to influence market trend
Key Differences Between Swing Trading Vs Day Trading
Both swing and day trading have carved their niche in the trading industry, but they are not the same. Key differences between the two trading styles are the following.
- • In day trading, traders buy and sell several stocks during a day. Swing traders trade several stocks over a larger time frame (usually between two days to several weeks). They wait for a trend pattern to emerge to amplify profit potential.
- • Day traders will close all their position before the closing bell rings. Swing traders will hold their position at least overnight before squaring off the next day.
- • Swing trading is a part-time job. Swing traders stay active for a few hours daily and don’t stay glued to the computers the whole day. Day trading requires full dedication and time.
- • It takes less expertise to swing trade than day trading. Hence, beginners can get success as swing traders more quickly than in day trading.
- • Day traders make several transactions a day, multiplying profit opportunities. But gains and losses are relatively smaller. In swing trading, profit and loss occurrences are less, but often substantial.
- • For day trading, investors need the latest technology and software. Day traders have to be really quick fingers on the trigger. Swing trading doesn’t need sophisticated and latest applications.
Swing Vs Day Trading: Which Is Better?
There is an ongoing debate regarding swing vs day trading.
As a trader, one’s first concern is to make maximum profit. So, between swing and day trading, which is profitable?
Both of the trading styles offer a wide range of advantages, but there are disadvantages, which you must note while choosing your style. The following list discusses the pros and cons of both.
- • In terms of time, swing trade is spread across a longer time frame, hence demands less involvement. on the other hand, day trading needs constant monitoring of the market, and you have to be quick in decision making
- • Swing traders look for a substantial profit, whereas day traders make maximum trades to optimize day’s profit
- • In terms of risk, swing traders assume more risk by leaving their position open overnight. Conversely, day traders close their position by day end. Hence, no risk gets carried forward.
- • In swing trading, the trade takes more time to mature, and traders utilise the time to follow the market movement. It helps in lowering the risk. Day traders have to be quick to execute trades because one loss can wipe out the entire profit from the day
- • Capital requirement is less for day trading than swing trading, which makes day trading accessible to most traders
Comparing Returns
The riskier the trade, higher is the return. Saying this, day trading allows compounding return on trades.
In day trading, the decision window is small, meaning the traders have to make decisions quickly, which increases the risk factor. The rule of thumb suggests traders have to risk 0.5 percent of their capital or 2:1 risk to reward ratio. This means when there is a loss, the trader loses 0.5 percent of their capital. But when there is profit, it is 1 percent of capital.
In the case of the swing trade, the profit pattern emerges slowly. With the same risk-reward ratio of day trading, one is able to make a 1 to 2 percent profit.
Advantages of Swing Trading
If you are not a full-time trader, your next best option is swing trading, which doesn’t demand you to stay glued to the computer screen all day.
Thirdly, it is the only game for retail traders. Remember, when you are a trader, you are working alone, and there could be numerous market conditions working against you. Unless you have a sizeable corpus available and the ability to digest bigger risks, day trading can be difficult. In day trading, you have to react especially fast, and unless you have a great deal of experience and knowledge about the market, it can be difficult. On the contrary, swing trading allows you to judge the market and analyze trading opportunities before execution.
| Day Traders | Swing Traders |
| Make multiple trades during the day. Don’t wait for a bigger profit to emerge | Swing traders observe trends, pick stocks that tend to perform better in a future date, sometimes in weeks or even months |
| Day traders continuously monitor the market for profit opportunities; one mistake can offset the profit earned in the day | For swing traders, profit and loss situations emerge more slowly and may result in higher profit |
| Demands more involvement. Often day traders are full-time traders | Swing trading doesn’t require constant involvement, and hence, it’s less stressful. Swing traders are often part-time traders |
| The leverage in day trading is usually four times of investment | Since it involves holding onto a position for days the usual leverage one gets is two times the initial capital |
| Day traders love the excitement of trading against trendlines | Swing traders base their decisions on technical analysis and trade in favour of the trend |
| The margin required for day trading is low | The margin requirement for swing trading is higher than day trading |
The Bottom Line
Swing vs day trading is an open debate. Both trading styles are widely popular, and there is a large number of traders falling in each category. You can select a style based on your trading personality. However, swing trading gives you more time to adjust to the market and bet for a greater profit. It rewards you for being patient and even beats the market over time. However, to successfully swing trade, you need to master the three Ms, mindset, method, and money management.
