Many active traders monitor short-term stock movements and seek to profit by utilizing a short-term trading strategy. Here are the fundamental differences between swing trading and day trading strategies to help you choose the best trading technique for you.
Swing Trading Vs Day Trading: Basics
Each short-term trading style has its own success rate, advantages, and disadvantages. Each set of traders operate on a different time frame that can have a significant impact on profitability.
What is swing trading?
Swing trading is a speculative trading strategy where a trader holds an asset in hopes to profit from its price change or “swing.” This swing is typically a minimum of one day but can last several weeks.
How long a swing trader holds onto a tradeable asset usually falls between a day trader and trend traders. During this hold time, the stock’s price is expected to fluctuate, and losses may be expected. However, by the end of the swing, the swing trader anticipates holding on to the stock long enough to lock in some gains.
What is day trading?
Unlike swing traders, day traders are usually in and out of the market in the same trading day. A single trading day for the United States equities markets is officially from 9:30 am EST (Eastern Standard Time) to 4:00 pm EST every Monday through Friday.
If you read all of the top day trading strategy books what you’d likely learn is that, in a nutshell, day traders have an even shorter hold on tradeable assets than swing traders. A day trader may hold a stock for only a few seconds but no more than a day, and definitely not overnight. Instead, they take advantage of the market swings and cash out their positions by the end of the same trading day.
Swing Trading Vs Day Trading: Your Trading Personality
Both trading styles seek to capitalize on short-term market fluctuations. However, each technique is best suited for a particular type of trading personality.
Time and Activity
Because day trading requires entering and exiting trades on the same day, a day trader may only hold onto an asset for a few seconds, a few minutes, or a few hours. As a result, day traders are watching charts every minute all day long. Intraday chart reading requires a great deal of constant attention and commitment. It also helps if you have fast reflexes to buy and sell when the time or “minute” is right.
On the other hand, swing traders watch a daily chart. At the minimum, these traders will likely hold onto an asset for one day, but most swing traders will wait a few days or even a few weeks before selling out their positions. Swing traders focus less on the minute to minute stock activities but aim to see a more significant trend.
As a result, swing trading does not necessarily have to be a full-time job. Most swing traders can check the daily charts once when the markets open and once when the markets close to monitor their open positions. Of course, swing traders also need to follow the news and fundamentals about their assets. However, constant monitoring on a computer is not necessary.
Another significant difference between day trading versus swing trading is the amount of patience required before you close positions. Day traders quickly buy and sell securities and close all positions on the same day. As a result, you can make quicker gains as well as quicker losses.
Alternatively, swing traders can wait several days before closing their positions. Naturally, swing trading accumulates gains and losses more slowly. However, this does not necessarily mean that these trades are less profitable!
Since day traders watch price movement charts that are plotted by the minute, they are extremely attentive, stressed out, and likely fueled by adrenaline during most if not all of the trading day. However, day traders close all positions by the end of the trading day. As a result, they do not need to worry about how news or overnight events may impact their stocks. Once the workday is over, day traders are usually stress-free until the next trading day.
Unfortunately, because swing traders focus on daily price, they must always be aware of how news and events may affect the stock market and their open trades. Having an open position overnight may be risky and more stressful for some people. However, this risk comes hand in hand with keeping a trade open for more than a day.
Swing Trading Vs Day Trading: Profit Potential
Day traders make multiple trades in one day, hoping for quicker profits in smaller moves. In general, for smaller accounts, day trading has more profit potential, in terms of the expected win percentage compared to the anticipated size of the win. For example, day traders typically target profits of two to five percent per trade.
Swing traders can achieve higher profit potential than day trading, but this requires taking on more risk with more account equity. In general, swing traders may look for 10 to 50 percent profit per trade.
It is also important to note that besides the profit potential, there are commissions and broker fees involved with trading that cuts into your profits. Day trading costs more in commissions because of the sheer number of transactions involved during the day. Swing trading costs less because swing traders hold onto their tradeable assets for an extended period of time, which ultimately results in fewer trades and commissions.
Swing Trading Vs Day Trading: Margin Requirements
Trading with margin is trading with borrowed funds, which is a percentage of the cash you have on hand or in your account. As with any borrowed money, margin comes attached with a brokerage firm’s interest rate.
For day trading, you can use up to four times your available cash for trading. This increases your buying power to a leverage ratio of 4 to 1. For example, if you have $100,000 in capital, you can trade up to $400,000 during the day.
On the other hand, swing traders can trade with a maximum of two times your available cash. Trading on margin increases your buying power to a leverage ratio of 2 to 1.
Additionally, the FINRA has set forth day-trading margin requirements, also known as pattern day trader regulations. Pattern day traders are required to maintain minimum equity of $25,000 at all times. You are a pattern day trader if you are a stock trading customer that day trades at least four times within five business days or if your brokerage firm designates you as one.
However, to trade on margin, your brokerage firm will also likely have specific maintenance requirements. These requirements may exceed FINRA’s margin minimum requirements.
Swing Trading Vs Day Trading: Fundamental and Technical Analysis
Swing Trading Vs Day Trading: Fundamental and Technical Analysis
Day traders have an advanced understanding of technical analysis. This strategy identifies trading opportunities by analyzing statistical data. For example, day traders spend a lot of time reading price charts to understand price movements and trading signals to evaluate a security’s strength and weakness.
Interestingly, swing trading typically utilizes a combination of fundamental and technical analysis. This technique combines statistical analysis (technical analysis) as well as macroeconomic factors and microeconomic factors that may affect a security’s value (fundamental analysis).
Macroeconomic factors may include economy and industry conditions while microeconomic factors may consist of company management and finances. In other words, swing traders pay attention to the daily movements of stock as well as relevant news and events that may impact the stock market and any of their open positions.
Swing Trading Vs Day Trading: Risk Tolerance
All investments and trades come with inherent risks. The U.S. Securities and Exchange Commission warns day traders that they should be prepared to suffer severe financial losses, at least in the first months of trading. They state, “While day trading is neither illegal nor is it unethical, it can be highly risky. Most individual investors do not have the wealth, the time, or the temperament to make money and to sustain the devastating losses that day trading can bring.”
As a day trader, you are exposed to a lot of risks because you are taking multiple trades in one day and can potentially lose a lot of money in a short period of time. On the other hand, there is less risk per single trade that it would be on a swing trade. However, less risk also means less reward.
Swing traders usually take on more risk than day traders because they hold a position for a longer period of time. Especially if you have an open position overnight, you are vulnerable to substantial losses. However, with larger moves, you take higher risks for a bigger reward.
Your risk tolerance and preference can determine which trading style is better for you. Ultimately, the most important thing is to win often enough and with sufficient gains to cover the losses when they occur.
Whichever trading style you prefer is mostly based on your account size, trading activity, risk tolerance, and personal preference. For a fast-paced trading service, subscribe to Stealth Profits Trader to learn day trading strategies like the pros. New York Times bestselling author and expert analyst for Fox Business and CNBC D.R. Barton, Jr. can teach you everything you need to cash out faster than you may have ever thought possible.