Swing Trading vs. Day Trading
2021-11-19 | Simpler Trading Team
In this post:
- What type of trading has become very popular in actively traded stocks?
- What do day traders typically buy and sell on the same day?
- How much is the minimum amount of day trading required to day trade?
When people think about trading, many immediately think of swing trading. But day trading has also become very popular in actively traded stocks. If you’re considering jumping into the markets, you may be researching trading strategies to find the right fit.
Let’s go over how swing trading and day trading work, how they differ, and how to decide which one might be best for you.
- Day traders typically buy and sell securities on the same day, often at multiple points throughout the day. They rely on indicators and real-time information for quick decisions.
- Swing trading is still an analytical form of trading but it involves trading over days, weeks, or sometimes even months. The momentum predictions, upward or downward, drive trading decisions.
- There is a minimum amount of $25,000 required to day trade, known as the pattern day trader rule (PDT rule), but experienced traders have tips for working around this rule. No such requirement applies to swing trading.
- Day trading may be a good choice for those who want to partake in a more active trading environment. While swing trading may suit those who are more patient and less hands-on, waiting for their preferred price action to take effect.
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What is Swing Trading?
Swing trading is a strategy that aims to make a profit by holding on to a position until indicators point to either an upward or downward trend. This can range from a few days to weeks. Swing traders use technical indicators to analyze whether a specific stock has directional momentum and determine when the best time is to buy or sell according to their analysis. Swing traders profit from the swings in the market by entering or exiting at the right moments.
What is Day Trading?
Day trading refers to the practice of buying and selling a security within a short time frame, usually a single day. The goal is to make a small profit on every trade and then accrue those gains over time. It takes place mainly in stock markets (that includes options and futures) and the foreign exchange, also known as forex. A day trader uses short-term strategies and tools to exploit small price movements throughout the day. From a regulatory perspective, if you execute four or more trades per day over five days, you’re designated as a pattern day trader (PDT) and you’re subject to additional requirements.
What’s the Difference Between Swing Trading and Day Trading?
Both styles technically have a short position element designed in each strategy. However, the difference between the two, although minuscule, offers drastically different techniques for both strategies. Let’s explore this further.
All trading involves risk. But the type of risk differs based on the type of strategy you choose. By trading within such short-time frames, day traders by definition avoid the market risk that results from long-term shifts in the market. Their risk comes from unexpected highs and lows in a single day. They manage these risks by using a disciplined plan and placing boundaries for themselves on when to buy and sell.
Since they do trade more frequently, day traders have higher transaction costs, which can decrease overall profits. In order to maximize profits from small price changes, they often trade with leverage, which brings its own kind of exposure.
The risks in swing trading align with what most people think of in typical investing since the “swing” is the upside or downside of the market. Swing traders tend to have larger positions so their gains, and losses, maybe larger than day traders… but not always. Swing traders are vulnerable to the risk of overnight price movements, and they hold positions for longer periods to take advantage of the longer-term market shifts. This can tie up monies and create opportunity costs for traders.
2. Time Commitment
As a result of the longer holding period, swing traders don’t have to constantly monitor their trades as day traders do. A swing trader will check their positions less frequently and move only at the most critical point – typically when the stock swings in the upward or downward direction. They make several trades per week, at most, and positions can last from days to weeks. That’s usually why swing traders keep their day jobs and work on swing trading part-time.
Day traders typically trade for a minimum of two hours a day. The best times for day trading are during the opening and closing hours of the market – that’s when the greatest volatility occurs and there’s the most opportunity to capture a profit as a result. However, stocks can bounce around any time during the day. Some people day trade part-time, just jumping into the market in the morning or afternoon and pursuing a different career during the day. More serious day traders put a lot of effort into choosing companies and industry focus, which means technical analysis, preparation, and review is required. As a result, many turn day trading into their full-time job.
3. Capital Required to Get Started
As we’ve mentioned, there’s no minimum amount of capital required to swing trade stocks. The barrier to entry is low, which is an appeal to many people. Whereas, regulators require pattern day traders to have a minimum of at least $25,000 in their account. This is known as the pattern day trader rule. As long as swing traders don’t fall into the pattern day trading criteria, they aren’t subjected to that minimum requirement. Professional day traders have strategies for avoiding these rules. That’s just one of the reasons why enthusiasts seek out day trading mentors to guide them through the process.
Swing traders can also buy on margin. Stock market swing traders are eligible for up to two times leverage when they buy on the margin. As an example, if a trader’s approved for margin trading, for a trade with a current value of $20,000, they only need to put up $10,000 in the capital.
4. Profit Potential
Day traders have a greater number of trades than swing traders which can allow for greater profit potential overall. On the other hand, with the longer time frame for swing trading, the profit targets for swing trades tend to be larger. Ultimately, for any trader, the profit potential is about making the right trades at the right times and managing your risk properly.
Day traders have less time to realize a profit – they sometimes have only seconds to open or close a trade to maximize gains. This can be exciting or stressful, depending on your point of view; if you’re able to execute the right trades quickly, there’s plenty of money to be made. Ultimately, the profitability of each strategy really depends on the trader’s preference, preparation, and skill.
5. Tools and Platforms
Both day trading and swing trading require technical and fundamental analysis but they differ in the kind of application that’s applied.
Swing trading requires a combination of technical analysis and market fundamentals to succeed. The tools can be offline and the data can come from routine daily news, longer-range projections, economic cycles, and the like. Indicators such as the Relative Strength Index (RSI) and the Moving Average (MA) are critical to predicting price movements.
The same indicators that swing traders use can also benefit day traders. That being said, day trading requires more tools and real-time data than swing trading – short-term buying and selling signals are key as speed is the name of the game.
A typical day trader uses a trading platform, charting software, and state-of-the-art computers to start. Some of their other tools include scanning software, breaking news software, and in some cases, a broker. All of this is meant to deliver information fast and frequently.
Swing Trading or Day Trading: Which One is Better?
At this point, you might find yourself asking, “Which one’s right for me?” Well, both of these have pros and cons. Objectively speaking, neither strategy is better than the other, and traders should decide what best compliments their abilities, lifestyle preferences, and goals. The reality is that many traders do both to help balance their overall portfolio.
To help you determine which style suits you best, here are some questions to consider:
What is your personality?
Do you excel in high-pressure environments? Are you attentive to detail or more of a “big picture” type of person? Day trading is fast-moving, to say the least, and requires discipline and undivided attention. You need to keep track of multiple monitors, pieces of information, and trades, all at once.
If you’re looking for a less intense style, then swing trading may be for you. This method is all about looking at larger trends and viewing markets from a wider lens. If you have the patience and fortitude to act on the right market shifts when the time comes, then take a second look at swing trading.
How much time do you have?
Day traders are most active when the stock market first opens, particularly between 8:30 am CT and 10:30 am CT. On top of that, day traders still do research and monitor the markets during the day. The more time investment and actual trades conducted, the more profit potential a day trader has. So the time commitment is really dependent on the individual’s goals. But no doubt, a day trader’s daily schedule would coincide with market hours.
Swing traders watch the markets too. But swing trading might seem more flexible because you don’t have to buy and sell all day long. The analytical work of monitoring investments and strategizing trades still takes time though; without this work, your trading won’t be as successful.
So the difference between the time commitment for day trading vs. swing trading depends on how and when you spend your time. But if you’re committed to getting it right, chances are you’ll be equally as busy with both.
How Much Money Are You Willing to Trade?
Swing traders can enter the trading game with much less capital than day traders. As we’ve mentioned earlier, there’s a $25,000 capital requirement for pattern day trading, but there are also workarounds for those who want to stick with smaller accounts.
Is Day Trading for You?
Day trading is dynamic, highly dependent upon tools and smart planning. Day traders, no matter their level of experience, commit to the craft of day trading and continuously improve their skills. It’s a fast-paced life and having a guide to show you the way makes the journey so much better. Simpler Trading has a wealth of resources to help you become the best day trader you can be.
If you’re ready to give day trading a shot, download our free ebook, “Getting Started with Day Trading.”
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Q: What indicator is best for swing trading?
A: Swing trading requires a combination of technical analysis and market fundamentals. Indicators such as the Relative Strength Index (RSI) and the Moving Average (MA) are great for identifying trends.
Q: Which time frame is best for swing trading?
A: There is no one best time frame, but generally the time frames for swing trading are longer than the ones for day trading. Swing traders typically look at hourly charts and above, including daily and weekly charts.