Swing Trading vs Day Trading - Key Characteristics and Differences

Although very similar, the main difference between day trading and swing trading is the time frame and frequency at which trading occurs. As opposed to long-term investing, both of these strategies aim at profiting from short-term stock movements. As the name suggests, day trading is performed during one trading day, while swing trading lasts overnight and usually for days and weeks.

With electronic trading gaining popularity, different trading styles and strategies started emerging. Swing and day trading are among the most popular ones. So let's have a look at their specifics and help you choose the best trading strategy for 2022-2023.

Day Trading Definition

Day trading refers to the style in which traders open and close multiple positions within a single day. It means that day traders tend to buy and sell the same financial instruments during one trading day without leaving open positions or owning any securities overnight. The goal of a day trader is to profit as much as they can from daily price movement and market volatility.

By making these multiple trades they gather many small profits which can result in considerable amounts at the end of the day. If they are to make a profit, the buying price of the stock should always be lower than the selling price, which is, unfortunately, not always the case. As in any trading, gains and losses are both parts of the game.

Day traders spot the trend in the market and react quickly so to take the advantage of short-term price movements. Prices spike most during market open and close times and this is when day traders are typically most active. In order not to miss profit opportunities, day traders have to follow the market closely. That's why day trading is considered to be a full-time job.

Day traders have to rely on trading platforms, technical analysis, charting software, and powerful computing devices to be able to make the right decisions in a matter of seconds. Automation is usually necessary to make trading profitable because sometimes prices change before you can even decide to make the trade. Day traders rely heavily on technical analysis and sophisticated charting systems to detect trading patterns and make well-informed decisions.

Technical vs Fundamental Analysis

Technical and fundamental analysis are the two main methods used to analyze securities and make investment decisions. In fundamental analysis, a true or fair market value of shares is determined by examining the issuing company's financial reports and current market and economic conditions. On the other hand, the technical analysis aims at predicting the price movement based on historical data such as price and volume. It uses price trends and price action to create indicators.

Day Trading Pros and Cons

Pros

Day trading is often associated with a specific lifestyle, thrilling, high-risk environment, fast pace, and adrenaline-driven approach. Depending on your taste and lifestyle, these might be considered advantages or disadvantages of day trading.

Day trading requires your full attention throughout the day, carefully monitoring price fluctuations and looking for trading opportunities. For those who already have full-time jobs, this could be seen as a disadvantage.

Unlike many other jobs in finance, it is not necessary to obtain a university degree in order to become a day trader. So if you've got enough capital and a good sense for trading you can try yourself in this thrilling quest. However, although no formal education is required, it is highly recommendable to take at least one of many courses in technical analysis or specifically day trading existing out there to give you a head start.

Since day trading involves making transactions multiple times within a single day, it is possible to amass a significant amount of profit at the end of the day. This means that day trading has a big profit potential.

Cons

On the other hand, too much excitement and risky situations on a daily basis can be too stressful leaving severe consequences on your health. Also, since day trading requires your full attention and more than just a few hours a day, it might be too demanding for some. And of course, just like many trades a day mean the possibility of making a big profit, it also means making big losses. When you open a position and expect a certain trend but unfortunately the market turns against you, you're likely to experience unpleasant losses the size of which depends on the size of the investment. Another important thing to consider is - day trading requires considerable investment in trading platforms, computing devices, and charting software.

Swing Trading Definition

Swing trading refers to a style of trading in which traders open a position and keep it at least overnight or for a few days to several weeks, sometimes even months. Swing traders base their activities on identifying swings in stocks, forex, and currencies (or other financial instruments) that happen in the course of a couple of days or weeks. What swing traders typically do is try to anticipate how the prices will move and then buy and sell assets at the right time so that they can keep a portion of the price difference. Although it takes longer to perform a swing than a day trade, a swing trader also relies on market volatility and liquidity.

In order to be able to anticipate these moves and identify stocks with profit potential, swing traders utilize both fundamental and technical analysis. They define their tactics based on various indicators and tools, such as:

• momentum indicators,

• price range tools,

• multi-day chart patterns.

Cup-and-handle and head-and-shoulders are among the most common patterns identified. Another important indicator is the measurement of market sentiment where tools like InfoNgen can come in really handy. All these are used to define a trading plan, tactics, and exit methods.

Candlestick Charts

Candlestick charts are used by traders to observe price movements in the past and by following the indicators to make trading decisions. They contain four price points (open, close, high, and low) within the time frame specified by the trader.

Swing trading can be taken up as a side job since it doesn't require your undivided attention throughout the day. Once swing traders establish tactics, identify a pattern, and set a stop-loss order, they can only spend a couple of hours a day checking their positions and if the prices move in the anticipated direction.

What Is a Stop-Loss Order?

Stop-loss order is a tactic used in swing trading to reduce risk and limit loss. By placing a stop-loss order a swing trader defines a stop price of a security at which it is to be sold or bought at the market. This way swing traders limit their losses in case prices start moving in the direction opposite from the one they expected. This order is executed automatically at the next available opportunity.

Swing Trading Pros and Cons

Pros

Swing traders aim at capturing big movements which means that they can set a profit target, monitor how the situation is developing, and close their position at the most profitable moment. This also means that thanks to the longer time frame swing traders don't have to spend too much time per day.

Another great advantage of swing trading is the possibility of partially automating it by setting a stop-loss order. Although there is a certain risk in doing this, it gives a swing trader more freedom while still being protected from the worst-case scenario. Also, huge investments in equipment are not necessary for swing trading, one computer and ordinary trading tools are enough to successfully perform swing trading.

Cons

On the other hand, there are certain disadvantages to swing trading to be considered. Keeping a position open overnight and during the weekend bears a high amount of risk. Also, the longer a position is open, the higher the chances for the situation to start developing in an unfavorable direction, different from the one predicted. Also, during all this time your capital is locked in one position leaving you illiquid until a favorable situation emerges so you can close the position.

Technology as a Helping Hand

In order to provide reliable information, tools incorporated in trading platforms must efficiently process high-frequency time-series data. Solutions such as TimeBase are of crucial importance. This particular solution can meet the requirements of a wide range of businesses (from individual traders to sophisticated enterprise-level trading platforms).

Another solution for efficient real-time computations on financial markets is RTMath. It's used for processing large quantities of real-time and historical time-series data. It's thanks to the solutions like these that both a swing and a day trader can get insight into market trends and patterns and identify strategic enter and exit opportunities.

Day Trading vs Swing Trading - Key Differences

Frequency and Time Frame

Comparing swing trade vs day trade, the main difference is the fact that swing trading involves holding positions open overnight, while in day trading all positions are closed before the market closes for the day. While day traders try to take advantage of very short-term price movements, swing traders often hold positions for a longer period of time, waiting for larger price movements in order to make larger profits in as fewer trades as possible. So, as opposed to day trading in which multiple smaller profits make up one bigger, in swing trading one carefully planned trade is expected to bring a considerable profit. Just like gains are bigger or smaller, the same goes for losses meaning that swing traders are likely to experience bigger losses than day traders.

Dynamics and Excitement

While day trading is extremely dynamic and involves a lot of excitement on a daily basis, swing trading is much slower, more methodical, and often considered less entertaining.

Time Required

Many day traders often spend hours in front of their computers trying to spot the right moment to exit which is rather demanding and time-consuming making day trading a full-time job. On the contrary, swing trading can be taken as a part-time job since it doesn't require that much time per day.

Necessary Investment in Equipment

Another important difference is how much money is necessary to invest in the equipment. If they are to be quick and react on time, day traders need expensive computers and various tools to help them. On contrary, swing traders can rely on much less expensive tools.

Difference Between Day Trading and Swing Trading

Crypto Day Trading

Some of the most common crypto day trading strategies include scalping, range trading, and arbitrage. Prices of cryptocurrencies are very unstable making this market highly volatile. It is highly recommendable to make a thorough research and develop a reliable strategy in order to succeed. For day trading cryptocurrencies you need an intuitive crypto trading platform.

Risks and How to Avoid Them

Both day traders and swing traders are exposed to risk with day traders being in a worse position. Statistics say that most day traders suffer severe financial losses at the beginning of their trading career. Unfortunately, many of them never reach profit-making status.

Furthermore, day traders are advised to invest only the money they are ready to lose. However, a lot of them borrow money either through margined trades, meaning borrowing money from their broker-dealers, or from their friends and family. Also, there is a 1% risk rule commonly followed by traders. It says that no more than 1% of the portfolio should be invested in one single trade.

Both day trading and swing trading require traders to master quite difficult skills. What can help are numerous online courses specifically designed to meet their needs. Also, before trading real money on a real trading account, you could try paper trading and demo accounts - making hypothetical trades in order to boost your skills.

Which Trading Style to Choose in 2022-2023?

When considering day trade vs swing trade, the answer to this question depends on you - your goals, lifestyle, skills, time, and funds available. If you prefer a dynamic lifestyle with risks involved, day trading should be your choice. Just remember that to be a successful day trader it also takes having a strong skill set not very easily acquired.

If you prefer a more methodical approach, without a lot of turbulences and without spending too much time trading every day, then swing trading is the option for you. Also, if you can't invest in expensive tools to help you trade, you should also opt for swing trading.

As far as profitability is concerned, it also depends on you and your skills. A day trader who makes numerous small profits can earn as much as a swing trader making a big one.

Regarding the risk, while a day trader is exposed to it to a much higher extent, a swing trader is not also immune to it. The more experienced they are, the lower the risk is. Follow the advice on how to reduce it and don't forget - practice makes perfect.