Stock market investors have two primary choices for short-term trading strategies: swing trading vs. day trading. As alternatives to traditional buy-and-hold investments, these approaches appeal to active traders who can stomach more risk.
Both have the purpose of earning profit through immediate market price movements over short timeframes. However, swing trading vs. day trading comes down to different methodologies and risk management profiles. Understanding the differences helps you decide which fits your style.
In this post, we’ll weigh the traits, pros, and cons of swing trading vs. day trading. We’ll explore each style to help you pick the one that suits your investment goals and temperament.
Swing Trading: Fewer Trades, Big Profit Potential
Swing trading is designed to catch price “swings” over a few days to a few weeks. Swing traders shoot for more substantial price movements and hold positions just long enough to ride out temporary dips, but not so long that they become entrenched in your portfolio.
The approach is a more comfortable compromise between long-term strategies and the breakneck pace of day trading. It’s better for investors who want to access more active trading but can’t monitor charts all day.
Principles and Timing of Swing Trading
Swing traders look for signs of shifts in market momentum. They rely on trend following to monitor drifts going up and coming down, seeking the sweet spot just before the stock has a major breakout. They sit tight for anywhere from a couple of days to a few weeks, then exit the position just before momentum halts.
Generally, swing trading involves fewer actual trades than day trading. However, since the holding period is longer, there’s greater potential for profits. Many swing traders use daily or four-hour price movement charts to gauge trends and estimate the best points for entry or exit. They filter out daily noise and focus on broader price moves.
Risk Management and Financial Upside
Since they hold their positions for days instead of hours, swing traders run the risk of being impacted by market volatility from developing news and unexpected events. This may create price gaps at the opening of daily business. Stop-loss orders help manage that risk.
Swing traders aim for larger gains per trade than day traders. Success in swing trading is defined by the frequency of winning trades and average profit per transaction. It’s a good fit for part-time traders.
Pros and Cons
The biggest advantage swing trading has over day trading is that it is less time-intensive. It doesn’t have to be an eight-hour-a-day activity. There’s more profit potential due to the longer trade “tail” that comes from holding onto positions for longer times.
Downsides of swing-trading include the overnight gap risk from after-hours news and events. It also requires traders to tie up their capital for a while, so it’s more suited to the patient investor.
Example of a Swing Trade
Suppose that you have your eye on a tech company that’s making inroads in artificial intelligence. You notice its price has dropped to a support level in line with its 50-day moving average, and its candlestick pattern is in a bullish “hammer” pattern.
This stock is near the point where it’s likely to move back up, so you enter the position with 50 shares at $120 each, or $6,000 total. In case you’re wrong, you set a stop-loss order if the price drops to $115.
You wait eight days. Sure enough, the price rebounds to $135 a share. You also notice that the price is awfully close to previously displayed resistance levels, so another swing might be coming. You decide to cash out at $135 before momentum slows, selling all 50 shares for $6,750. That’s $750 in profits, or a 12.5% gain.
Day Trading: Betting on Market Volatility
Are you braver, sharper, and more caffeinated? If so, day trading might be worth looking into. It’s an intense approach in which you open and close all positions within a single business day.
Day trading is about volume. The goal is to capitalize on smaller price movements through one day — the more leverage you can use, the better. It could require dozens or even hundreds of trades during a single market session.
Principles and Timing of Day Trading
The main objective of day trading is to eliminate overnight risk. At the end of the business day, traders close out all their positions to sidestep exposure to news events that occur after hours. It requires minute-by-minute focus on minuscule price shifts.
Investors may buy and sell their positions within mere seconds. Trades are rarely held for more than a few hours. Some brokerages automatically liquidate day traders’ positions just before the market closes for the day if the trader hasn’t already done so. The charts they consult are extraordinarily short-term — 1, 5, or 15 minutes between changes.
Risk Management and Financial Upside
Due to its frenetic pace and often high leverage, day trading carries a precariously high risk. Risk management must be airtight. Tight stop-loss orders — very close to the entry price — are almost mandatory. Instead of big profits per trade, day traders chase small, frequent wins.
The key to successful day trading is consistent, constant, almost robotic execution. Tiny gains add up through volume. Keep in mind, however, that multiple trades could result in higher commission costs.
Pros and Cons
The lack of overnight risk in day trading gives traders more control over their capital exposure. Profits can turn quickly. Professional day traders who have honed their skills can earn a very respectable income.
The cons? Sky-high stress levels — potentially unhealthy ones. Day traders can’t take their eyes off the ball. They must also have access to a lot of capital. The Financial Industry Regulatory Authority (FINRA) requires that pattern day traders have at least $25,000 in a margin account at all times. Commission costs are another drawback.
Example of a Day Trade
Suppose that you’ve been looking at a high-volume tech stock in the hours before the market opens. When business starts, you see that it has high market volatility. Your one-minute chart displays a bullish candlestick pattern right near the support level. You think interest in this asset is going to be high today.
You buy 100 shares of the stock at $80.00 ($8,000 in all). You set an extremely tight stop-loss order of $79.50. Fifteen minutes later, the price shoots to $80.25. You see momentum slow down, nearing the intraday resistance level, so you “scalp” all 100 shares for a profit of $25. Then, you do this over and over for the rest of the business day.
Swing Trading vs. Day Trading: Which Is Right for You?
If you have a knack for technical analysis, swing trading might be a good fit. Solid experience with interpreting data movement, finding support and resistance levels, and noticing indicators like moving averages and candlestick patterns is also helpful. Spotting broader market trends and sector-wide performance is a key advantage, as are self-discipline and perseverance.
All of those traits are good for day traders, too. However, you also need to be attuned to micromovements and the flow of the business day. You must focus on immediate price changes and rapidly moving indicators. Day trading requires the intestinal fortitude to handle daily rollercoaster rides of the market and the maturity to respond to winning and losing streaks.
Ultimately, the question of swing trading vs. day trading comes down to temperament, time commitment, and trading objectives. If you thrive in a tightly structured, high-intensity routine and can make fast decisions, day trading could work for you. If you prefer a more flexible, patient process with more analysis and less screen time, swing trading may fit. An honest self-evaluation can help you choose.
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