The Difference Between Swing Trading and Day Trading

A trader’s choice of a time-frame on which to base their trading strategy can significantly influence that strategy and the trader’s profitability. Day traders have a short term strategy, opening and closing multiple trading positions each day. Swing traders, on the other hand, are into a longer term strategy with individual trades lasting for days, weeks and often months.

These two different approaches will suit different traders depending on their capital availability, how much time they have, their psychology and the market they choose to trade within.

There is no right or wrong in terms of either trading system; what’s best simply boils down to individual circumstances. Some traders will stick exclusively to one system, while others may have a mix of day, swing and buy-and-hold trades concurrently.

Potential Returns of Day Versus Swing Trading

If you are looking for rapid compounded returns, day trading may seem attractive to you. If you were to risk 0.5% of your capital on each trade, you stand to lose 0.5% if you lose. If you win however, you will make 1% (with a 2:1 reward to risk ratio).

Let’s assume that you win 50% of your trades in a day. If you make 6 trades per day you will be accumulating 1.5% to your balance each day. This equates to around 1% each day after you’ve taken trading fees into account. So, over the course of a year you will increased your trading account by 200%.

Of course, the same applies for your losses. Making double the amount on your wins as you what you lose on your losses and sustaining this on half of all your daily trades is difficult to achieve. Your balance can grow rapidly; it can also shrink just as fast.

Swing trading will accumulate gains and losses much slower that day trading. However, there still are opportunities for you to have quick gains or be hit by fast losses.

Assume you were to use the same example as for the day trader above, risking 0.5% of your capital with a target of between 1-2% for winning trades. If you were to average 1.5% on your wins and 0.5% on your losses, your winning 50% of the 6 trades you male per day would make you around 3% in an average month, after trading fees. That is 36% return over the course of a year, which may sound good but is much less than the potential returns from day trading.

Of course, these are just two examples through which to compare the two trading styles. If you were to alter the percentage of winning trades; the average returns of wins or losses; or the number of trades completed, then earning potential of each strategy is altered dramatically.

Generally speaking, day trading offers more potential for profit. This is certainly the case with smaller accounts, however as the amount of capital increase it becomes more difficult to deploy it during short day trades.

In percentage terms a day trader may actually see their returns drop as their capital increases. However, their returns in terms of dollars may still increase; this is because a return of 5% on $1M is much more that 20% return on $100K. This scenario is less likely for swing traders.

Variation of Capital Requirements

Depending on the market you are trading in, you will have a variation in the required capital requirements for trading. Both day and swing traders will have different capital requirements to start trading in Forex, stock or futures markets.

In order to trade stocks in the United States as a day trader you will need to have an account balance of at least $25K. There is no minimum requirement for swing trading, however a realistic figure is between $10-20K and definitely toward the upper end of this if you are considering drawing income from your trading activities.

Day trading the Forex market has no legal minimum requirement, but it is preferable to have between $500-1,000 at least. Swing trading in Forex markets comes with a recommendation of at least $1,500 as this will allow you to have several concurrent trades.

If you want to trade futures as a day trader you will need between $5,000 and $7,500 or more depending on what the futures contract dictates. Some day traded futures require much more capital than this, but there are also others, like micro contracts, that require less.

Swing trading futures comes with a requirement of at least $10-20,000, depending on the margin requirements of the contract you intend to trade.

Different Trading Times

It takes up your time conducting any type of trading, but day trading has a tendency to take up much more of it than swing trading does. Day traders tend to trade for around 2 hours per day. On top of this there is time spent on researching and reviewing trades which can be another couple of hours each day. So, you are talking about spending at lest 4 hours each day in front of a computer screen. Decide to trade for more than 2 hours each day and it becomes a full time occupation.

On the other hand, swing trading can take up much less of your time. For instance, you could be trading off a daily chart, so finding new trades and updating current ones may only take you 45 minutes each evening. It may not even be needed every night.

Many swing trades will be in place for several weeks or months, so may only require updating on a weekly basis. In this scenario, the time commitment may be reduced to 1 or 2 hours per week.

Another factor to consider is that day trading needs to be done whilst the market is open and the most effective times to trade throughout the day are limited. If you are unable to guarantee being available at these key times, swing trading could prove to be a better option for you. Swing traders can seek out trades and place orders any time of the day or night, whether the market is open or closed.

Swing trading is also less affected by short term fluctuations (we’re talking by the second here) in asset prices. Swing traders focus on the bigger picture, typically look at performances throughout the day and placing an order when the market has closed for the day. Day traders rely on the second-by-second fluctuations to make their money, so they need to watch market movements with the eye of a hawk to ensure they maximize their profits.

Focus, Practice and Invest Time

To generate consistent profits, day trading and swing trading both need a lot of work and research put into them. To achieve consistently successful trading results, you will need to develop a strategy that produces a profit over a large number of trades. Once you’ve identified this successful strategy, you need to repeatedly execute it.

Having a bit of market knowledge and a single profit-producing strategy will start to generate you income. Practicing this strategy, again and again, under the different prices of each day will let your strategy adapt and develop to the ever changing market conditions.

Of course, this can be challenging, but you will only be able to generate consistent results having practiced your strategy in various market situations. This will take time and should first be tested out out hundreds of times using a demo account before putting your capital at risk

Your personality also plays a part in your choice of day or swing trading. Day trading can be more stressful than swing trading and also require more of a sustained focus for long periods. This takes discipline, but many people are prepared for this because they enjoy the action and have the quick reflexes required to act fast. Video gamers and poker players are two typical groups of people that would likely choose day trading over swing.

With swing trading the action is much slower and a long time can elapse between opening and closing positions. It may not require the sustained focus of day trading, but it still needs patience and discipline, and can be highly stressful.

Both day and swing trading offer you the freedom of being your own boss; both type of traders typically work on their own. They generally fund their own accounts and can reap all the profits made; the same, of course, applies to the losses. A swing trader might argue that they have more freedom than day traders as swing trading takes up less of their time.

Conclusion

There is no best method of trading, just different ones. In terms of potential profits, day trading has the advantage, for smaller capital accounts certainly. Swing traders, to a certain extent, can maintain their percentage returns as their capital grows.

A big difference between the two is the capital requirements to get started. Another one is the time requirement; you will need to allocate more time if you want to be a day trader. Both, however, will require investment of time and effort to become practised and knowledgeable of your chosen markets.

The choice between day and swing trading could simply come down to your personality. If its action you want, day trading will keep you excited. If you are after less stressful and time consuming trading, opt for swing trades.

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