2024.08.15 2024.08.15
Day Trading vs. Swing Trading: What’s the Difference?

Oleg Tkachenkohttps://www.litefinance.org/blog/authors/oleg-tkachenko/

Trading in financial markets can bring substantial profits. However, the result largely depends on a trading method. Although risk plays a significant role in trading, having a clear strategy is essential.

Today’s financial market offers a variety of trading strategies so everyone can find a suitable method. One crucial aspect of any trading strategy is time. The profit depends on the time a trader spends on a transaction. Short-term trades require more frequency, as their one-time profit is small, while long-term trading can sometimes bring a monthly target income with a single transaction.

What is day trading?

Day trading implies trades’ execution within one day without rolling over a position, thus avoiding additional commissions like a swap fee. Day trading usually refers to scalping or high-frequency trading.

Scalping is a trading strategy that involves making a large number of short-term transactions prioritizing quantity over quality.

High-frequency trading is a trading strategy that relies on automated trading systems or robots. These robots are programmed to identify patterns on a price chart and trade without human involvement during a trading day.

Thus, day or intraday trading is a highly demanding process requiring various psychological qualities. A trader should be diligent, stress-resistant, self-disciplined, and able to work under stress. It is also important to be ready to intervene in the trading process and make necessary adjustments promptly.

Advantages of day trading

1. Day traders believe that one of the main benefits of intraday trading is the flexibility to trade at any time. Moreover, day trading offers various other advantages:

2. You do not have to pay a swap fee, an additional charge for holding a position open until the next trading day. A swap is debited or credited once a day at a specific time. If you trade intraday without keeping your trades open overnight, you do not have to worry about whether a swap is positive or negative.

3. Intraday trading allows you to trade in a highly volatile market and during high liquidity periods. This type of trading enables you to always get the lowest spreads when opening new positions and is not affected by spread widening, which often occurs at night.

4. Day trading can help you avoid price gaps that usually appear after trading halts or due to low market liquidity. Besides, trading during the major trading sessions minimizes the risk of gaps.

5. Finally, you can close a trade anytime without worrying about the result. A scalping strategy involves numerous short-term trades where each trade’s impact on the overall result is insignificant. Therefore, you can safely close a trade at a loss if you think you have made a mistake.

Disadvantages of day trading

Despite its obvious advantages, day trading also has several drawbacks, which many traders struggle with and, therefore, suffer from losses.

The main disadvantage is the psychological aspect of trading. Staying intensely focused on a screen or device for a long time can lead to mental and physical fatigue, resulting in frequent mistakes. Establishing a daily routine can help with this issue, but many people forget about it when experiencing a streak of successful trades.

1. The second disadvantage stems from the first one. Having too much faith in unlimited success can be harmful. Inexperienced traders may become over-confident in their abilities after a series of profitable trades and give up on their strategy when they encounter a loss.

2. Wrong perception of the amount of money. When a trader makes a lot of short trades, the profit or loss is often measured in pips rather than money because small deposits are counted in cents instead of dollars. This can cause problems when they start increasing their deposit size.

3. The result of trading largely hinges on each trading day. When following a trading plan, you aim to make a specific amount of money daily. However, trading hours may not be profitable and can lead to losses. To compensate for the drawdown, you have to trade more on other days, increasing the risks.

What is swing trading?

Swing trading is a style of trading that aims to hold a single trade for a long period, from several days to months. It is an intermediate between intraday and long-term trading. Swing trading is considered the most profitable and easiest stock or foreign currency trading method. Besides, it is mainly referred to as fundamental and technical trading.

Fundamental trading is a strategy for identifying important news and analyzing macroeconomic indicators of companies or world economies. This fundamental analysis helps forecast long-term trends and initiate trades or several positions simultaneously.

Technical trading is a strategy based on determining entry and exit points based on mathematical indicator signals or multi-day chart patterns. Day traders also often use patterns in trading, but the higher the time frame, the more likely the pattern will help bring profit.

Thus, swing or medium-term trading is the least demanding style of trading in terms of mental and physical effort. Experienced swing traders spend 90% of their time identifying entry and exit points and only 10% monitoring their trades. This approach starkly contrasts with day traders, who can spend up to 10–12 hours a day in front of their screens.

Day traders believe that one of the main benefits of intraday trading is the flexibility to trade at any time. Moreover, day trading offers various other advantages:

1. You do not have to pay a swap fee, an additional charge for holding a position open until the next trading day. A swap is debited or credited once a day at a specific time. If you trade intraday without keeping your trades open overnight, you do not have to worry about whether a swap is positive or negative.

2. Intraday trading allows you to trade in a highly volatile market and during high liquidity periods. This type of trading enables you to always get the lowest spreads when opening new positions and is not affected by spread widening, which often occurs at night.

3. Day trading can help you avoid price gaps that usually appear after trading halts or due to low market liquidity. Besides, trading during the major trading sessions minimizes the risk of gaps.

4. Finally, you can close a trade anytime without worrying about the result. A scalping strategy involves numerous short-term trades where each trade’s impact on the overall result is insignificant. Therefore, you can safely close a trade at a loss if you think you have made a mistake.

 Disadvantages of day trading

Despite its obvious advantages, day trading also has several drawbacks, which many traders struggle with and, therefore, suffer from losses.

1. The main disadvantage is the psychological aspect of trading. Staying intensely focused on a screen or device for a long time can lead to mental and physical fatigue, resulting in frequent mistakes. Establishing a daily routine can help with this issue, but many people forget about it when experiencing a streak of successful trades.

2. The second disadvantage stems from the first one. Having too much faith in unlimited success can be harmful. Inexperienced traders may become over-confident in their abilities after a series of profitable trades and give up on their strategy when they encounter a loss.

3. Wrong perception of the amount of money. When a trader makes a lot of short trades, the profit or loss is often measured in pips rather than money because small deposits are counted in cents instead of dollars. This can cause problems when they start increasing their deposit size.

4. The result of trading largely hinges on each trading day. When following a trading plan, you aim to make a specific amount of money daily. However, trading hours may not be profitable and can lead to losses. To compensate for the drawdown, you have to trade more on other days, increasing the risks.

What is swing trading?

Fundamental trading is a strategy for identifying important news and analyzing macroeconomic indicators of companies or world economies. This fundamental analysis helps forecast long-term trends and initiate trades or several positions simultaneously.

Technical trading is a strategy based on determining entry and exit points based on mathematical indicator signals or multi-day chart patterns. Day traders also often use patterns in trading, but the higher the time frame, the more likely the pattern will help bring profit.

Thus, swing or medium-term trading is the least demanding style of trading in terms of mental and physical effort. Experienced swing traders spend 90% of their time identifying entry and exit points and only 10% monitoring their trades. This approach starkly contrasts with day traders, who can spend up to 10–12 hours a day in front of their screens.

Advantages of swing trading

Swing trading involves maximum focus when determining entry and exit points. However, once traders enter the market, they only need to monitor the process from time to time. They can do other things while trading, which is a key advantage. The pros of swing trading also include:

1. A lot of profit opportunities. If a trader has correctly identified the entry point and the price moves in their favor, they have a huge range of methods to maximize profits, from a trivial trailing stop order to complex hedging strategies.  

2. Swing trades offer an opportunity to combine different trading styles. You can open a long-term trade based on the results of fundamental analysis and, simultaneously, open short-term positions on the same instrument using chart patterns.

3. Long-term profitable trades give a sense of accomplishment, unlike day trading. Even after a successful series of trades, day traders must continue to trade. For a long-term trading plan, one day means nothing. Trading becomes a full-time job. At the same time, a single swing trade can fulfill an entire year’s plan. 

4. A lot of time to make a decision. A day trader has to think quickly and make a decision promptly. A swing trader can evaluate potential trade profitability for several days using a qualitative approach to analysis.

Disadvantages of swing trading

Swing trading implies making a small number of trades over a fairly long period of time, which is often a problem for inexperienced, impatient traders. Long trades are boring for them, so they start trading additionally intraday. It often leads to a disaster, as they lack the skills to spot short-term price movements. Other disadvantages of the medium-term trading style include:

1. Setting stop-loss orders far away from an entry point. A long-term trade implies getting a large number of pips. If you plan to make a profit of 2,000 pips or more, the size of the potential stop loss should also be large, from 400 pips or more. It is hard to calmly watch your trade go into more than 400 pips drawdown.

2. High deposit requirements. The higher the trade’s profit potential, the more margin there should be on the account to withstand possible reversals and price drops. 

3. Understanding market mechanisms and money management is important for successful swing trading. This trading method may not be suitable for beginners because it requires a good understanding of market behavior. While you are actively trading, many events occur in the Forex market, so it is crucial to identify which events can impact the price.

Swing trading vs. day trading

Although the main difference between the two trading styles is timing, it is important to understand how they differ in terms of the key parameters of strategy evaluation.

Which is more profitable: a day trading or a swing trading?

If you ask traders which type is more profitable, each method will have an equal number of votes. Below, you can see a comparison of the two types in the same chart section using the most popular basic strategies.

For day trading, a three MAs breakout strategy was used. During a trading day, the strategy initiated 14 trades, 11 of which were profitable and three of which were closed by a stop-loss order. The total profit amounted to 285 pips.

A  trendline breakout trading strategy of technical analysis was used for the swing trade, initiating one trade during the period. It was closed profitably after the exit signal, having taken 245 pips of profit.

The results of both types are almost the same, and the difference is only in the number of trades executed. In the first case, traders should spend more time in front of the screen, while in the second one, the trade was just opened and closed. Time is the most crucial factor in trading, so the second method is preferable.

Conclusion

When choosing a trading method, consider your personal preferences. Intraday trading is hard and consistent work that can wear you out physically and mentally. It is a way of life. Some day traders could not handle the demanding schedule and left the market. However, there are also successful day traders who have been doing it for years.

Swing trading is like a hobby. A hobby is something you enjoy without too much expense or stress. If your hobby is also profitable, it is perfect. Swing trading does not require a lot of time. You assess the situation, and if there is no profit, you close a position and leave. If you gain profits, place pending orders, and also leave, the result will be achieved without you.

So many men, so many minds. The top of the Forbes list says that you need to work hard and consistently for good earnings, and this is more about intraday trading. On the other hand, if trading is just a hobby for you, then swing trading is more suitable.