Due to the high profitability idea linked with trading, many individual and retail investors have become increasingly interested in this sphere. Forex and stock exchanges see a daily trading volume of trillions of dollars, indicating the significance of these markets.
Traders approach the financial markets with different trading strategies conforming to their goals and suitability. Day trading and swing trading are among the most common trading styles prevalent among traders.
Although there is a difference in their operating patterns, they both have the same objective, i.e., to generate profits. So, are you curious about which trading style suits you better? Then read this article to understand the characteristics of swing and day trading with their inherent benefits and risks.
Swing trading
It is a trading strategy that involves holding trade positions for days, weeks, or months. Such traders mainly aim to catch a portion of the more significant price trend on the perfect entry signal. Moreover, patience is the key for a swing trader as most trades take a relatively large amount of time to reach their target.
Swing trading entails entering very few trades in a week or month, but the profit potential is higher than short-term trading methods. In addition, this type of trading necessitates less time commitment for monitoring trades and is consequently less stressful.
Due to a limited time requirement, a person can engage in swing trading as their side or part-time activity. However, sound knowledge about analysis techniques and market behavior is essential for the erudite execution of trades with profitability on a long-term basis.
These traders actively utilize technical analysis charting patterns and indicators to search for ideal trading opportunities. They usually work on bigger time frames and use technical triggers such as S&R levels, MAs crossover, trends trading strategy, Fibo retracement, and many others.
As an example, let us look at a swing trading setup of XAU/USD. The above chart shows a rising channel pattern in the 4-hour time frame. There is a selling break out of the upward trend, and the price has retested this breakout. Swing traders could enter the short position here on a solid rejection candle with targets at each support level.
| Pros | Cons |
Swing trading is less nerve-racking as it does not require your constant dedication and attention. As the trades go on for days to weeks, you only need to examine the trades periodically. | Long-term swing trades are subject to “gap risk” that can happen due to significant events or news during a closed market period. |
In this trading, market participants focus on quality over quantity and engage in fewer trades. They can procure large profits from entering in a few quality setups. | As these traders do not constantly monitor the markets, they can miss out on promising trading setups and price action. |
These traders pay less transaction and broker fees as they open fewer trade positions. | Some brokerage platforms charge fees for overnight held trades. |
Day trading
It is where traders open and close their trading positions within a single day. Day traders dedicate a lot of time to monitoring the financial markets actively. They examine various indicators and candle patterns to catch sudden price moves for accumulating quick profits.
Due to the requirement of constant attention, day trading is a full-time activity for people with strong nerves. Moreover, day traders must have solid expertise in reading market patterns and detecting the signals timely. These traders thrive on market volatility and liquidity for extracting spectacular profits.
However, in day trading, adjustment of risk-reward ratio and proper risk management is of utmost necessity as one big loss can wipe out many small gains. Such traders should have disciplinary qualities with minimum agitation or panic tendency.
Day traders engage in short-term trades; therefore, most of them solely rely on technical trading strategies. They utilize high leverages for capitalization on bullish or bearish price movements. Furthermore, most day traders, including scalpers, use shorter timeframes to enter the trade.
The above chart shows a price movement of the GBP/USD pair. It displays a quick day trading set up of a support level bounce of price in the 15-minutes time frame. Day traders would have entered a bullish trade here after the closing of the rejection candle. Stop loss would be precisely below the support range, exhibiting a high R: R ratio trade.
| Pros | Cons |
Day traders can capture many profitable setups and price movements as they actively monitor the market. | It requires a lot of time and attention. Without total dedication, it is not possible to effectively seize trading opportunities. |
This trading style gives you the advantage of obtaining quick profits. Traders swiftly profit from the volatile price action of major forex pairs and stocks. | These traders can quickly wipe out their accounts due to high leverage usage if they get greedy and ignore the risk management. |
These traders are safe from many risks, including the overnight gaps. Moreover, they do not face overnight position holding fees. | As a day trader executes multiple trades in a single day, he faces the broker bid-ask spread on each position. |
Which trading style is more profitable?
Both are profitable and only differ in their execution methods. Both strategies also carry numerous risks where traders can face accumulated small losses or one engulfing loss.
The profitability of either trading style depends on numerous factors, including the time duration of trades, trader expertise, account capital, price volatility, major or sudden news events, and choice of analysis method.
Swing trading vs day trading: which is better?
Inherently, no trading strategy can be labeled “absolutely better” than the other as both day trading and swing trading aim to acquire profits. The answer to this question lies in your personal preferences and comfortability.
Swing trading requires relatively less managing and market overview time as compared to day trading. Day traders spend a large chunk of time studying market movements daily to obtain many small profits.
If you are a trader with less time at your disposal, swing trading might be a better option. Also, if you cannot handle the stress of continuous market monitoring, swing trading would be the best for you.
Whereas if you lack patience and cannot wait for days/weeks to complete a trade, day trading would suit you. Moreover, if you can dedicate your full-time to trading and prefer quick trades, day trading is the answer for you.
Who makes more money?
In terms of money, you may end up trading more or less the same amount per month. The day trader can make up to 48 trades per month, and the swing trader about twelve. Depending on how much they use per trade, the percentage can be about the same.
Day traders can grow their earnings much faster. If they are successful, they can increase daily. This can be a significant benefit. However, as the day traders’ trading account grows, it can be difficult to use all the funds they have accumulated over time. They may even find that they start making more losses on short-term trades as their account gets more prominent.
A good amount for a day trader to start trading forex should be between $500 and $1000. While $1,500 is the best number for swing traders.
While swing traders are generally considered more profitable, this alone does not mean that you should become a swing trader. In reality, it depends on how well you implement your strategy more than anything.
Final thoughts
Each trading method has the potential to produce good returns. Trading styles differ concerning traders’ inclination and relative account sizes. However, the range of profits depends on the aptitude and skill of traders.
Whatever the method, trading involves price speculation and carries a substantial amount of risk. The critical factor for succeeding in this sphere is to be realistic about your profits. Trade with patience, discipline and avoid emotional trading at all costs.