In the trading world, active traders are normally grouped into two categories, day traders and swing traders. Both of these groups of traders aim to profit from short-term movements, mostly in stock trading, rather than from long-term investments. Both of these trading methods are used widely around the world, in multiple markets. However, before a trader chooses any method, it is wise for him/her to look at what each trading method offers and the pros and cons of each.
What is Day Trading?
Day Trading refers to a trading method that involves making dozens of trades in a single day, based on sophisticate charting systems and technical analysis. The objective of a day trader is to make a livelihood out of trading commodities, stocks, or currencies. They do this by making small profits on multiple trades, as well as capping losses on unprofitable trades. These traders do not normally keep any positions or hold any securities overnight.
Traders are enticed towards day trading because of the potential for earning significant profits. However, this is only true for a small number of individuals who possess all the required traits, which include discipline, diligence, and decisiveness. The United States Securities and Exchange Commission or SEC cautions day traders about risking money they can afford, it is quite a different case in reality. Many traders end up incurring huge losses on borrowed money, either through capital they have borrowed from family or other sources or through margined trades. These losses can not only end a trader’s career but land them in substantial debt as well.
Day Traders tend to work alone in an independent fashion not controlled by any corporate. They can have a flexible working schedule. They have to compete with hedge funds, high-frequency traders, and other market professionals who pump in billions to gain trading advantages. In such a competitive trading market, day traders have no choice but to spend substantially on trading platforms, charting software, computers, etc. There are also other ongoing expenses, including commission expenses that add up because of the volume of trades, as well as costs for obtaining live price quotes while trading.
Long-time day traders tend to enjoy an environment in which they are pitted against professional traders on a daily basis. The adrenaline felt from rapid-fire trading is a major contributing factor in their decision to become day traders. They cannot have any day jobs and must devote full their full time and capacity towards trading. He/she has to rely on their own skills and efforts to generate enough profit to make a decent enough living. Day trading can also get stressful for many because of the requirement to watch multiple screens at the same time to spot trading opportunities and act on them instantly.
What is Swing Trading?
Swing Trading is a Trading method in which traders rely on identifying swings in currencies, stocks, or commodities that can take place over a period of days. Swing traders usually work for a few days to a few weeks. They differ from day traders as they normally do not make trading a full-time career. Any individual possessing even tertiary knowledge of investment capital can perform swing trading. A swing trader is not required to be glued to the computer screen. They can have a separate full-time job and simultaneously conduct swing trading.
Swing Trading is a bit time consuming compared to other methods. For gaining substantial profits, traders need to keep the trade for an asset open for a few days to weeks, depending on the situation. Since it generally involves holding positions overnight, swing trading has higher margin requirements. The maximum leverage is usually two times the capital invested by the traders.
This is much lower compared to Day trading, where margins are four times the capital invested. Swing traders can set stop losses. This is done to avoid constantly monitoring open positions as in the case of day trading, even though there is a risk of stop being executed at an unfavourable price. However, it can also result in substantial losses which can be larger because they are required to hold their positions for longer periods than day trading.
When it comes to stress, swing trading is less stressful for the trader as it seldom is a full-time job. It is usually a source of side income for individuals who have a regular job with which they can offset or mitigate trading losses. Swing trading can be performed by using only a single computer and conventional trading tools.
Differences Between Day Trading and Swing Trading
Both swing trading and day trading have their own sets of benefits and drawbacks. There is no hard and fast rule about one strategy being better than the other and it all comes down to what is preferred by traders that work best for their individual lifestyles, trading skills, and preferences. However, when it comes to day trading, they have some pronounced advantages over swing trading as described below.
- Day Trading is ideal for traders who are serious in trading full-time and possess discipline, diligence, and decisiveness.
- Day Trading also requires an advanced understanding of charting and technical trading. Day trading can get intense and stressful, requiring traders to maintain their calm during trading.
- Day Trading also involves substantial risks including up to 100 percent losses.
Swing trading on the other hand does not require any formidable set of traits. It can be undertaken by anyone with some investment capital. It does not require traders to fully devote their attention to trading, helping them to do other activities such as a full-time occupation, along with trading. Swing traders can also apply a combination of fundamental and technical analysis instead of using technical analysis alone.
It should be remembered that both swing trading and day trading has their own set of pros and cons and the ultimate decisions depend on the trader’s skills, preferences, and lifestyles. Ultimately it depends on what kind of a trader one wants to be before they choose any one of these methods.