Day trading vs swing trading


Date: 30 April 2020

The global marketplace is more accessible than ever before. With the right software and broker assistance, you can trade currencies, stocks, and derivatives. Some love hurried single-day trades. Others keep their positions open for days, sometimes months.

The choice of the investing style depends on your goals, preferences, and available funds. Here is a basic comparison.

It is important to note that day and swing trading both have specific benefits. One may not be deemed better than the other.

Some traders use different strategies depending on the market situation. Profit potential can vary considerably depending on a combination of three factors. These are:

  • win ratio
  • reward-to-risk ratio
  • the number of trades

Minimum deposit

Both day and swing strategies can used for Forex trading, stocks, or futures contracts. In some countries, you will require at least $25,000 for day trading on the stock exchange. For swing trades, the minimum requirement is more modest - $10,000. Other cases may have different requirements:

  • currency day trades: no legal minimum, recommended balance $500
  • currency swing trades: at least $1,500
  • futures day trade: at least $5,000-$7,500 depending on the contract
  • futures swing trade: at least $10,000 depending on the margin

Profit potential (day trading)

The quicker the trades - the faster returns will accumulate. The following examples are given for an individual who uses a typical online trading platform, maintaining a 2:1 reward-to-risk ratio and a 0.5% capital risk on every trade.

In the case of loss, the trader has to part with 0.5%. A winning trade, however, will generate twice as much (1% in profit). Imagine the trader executes six trades per day with half of them succeeding. The gains would amount to 1.5% daily (minus fees). If the strategy is maintained over 12 months, the overall gains would amount to over 200%.

Of course, this describes an ideal scenario. In reality, it may be difficult to maintain the required win rate and reward-to-risk ratio. Moreover, your winnings may be undermined by unfavourable market conditions. Risk is always present.

Profit potential (swing trading)

Due to their longer terms, swing trades accumulate gains more gradually. That said, it is still possible to rapidly gain bigger profits or losses. Let's look at a hypothetical trader who adheres to the same reward-risk ratio. Each trade puts 0.5% of their balance at stake, like in the previous example. The objective is to earn 1-2%.

Next, imagine winning trades generate 1.5%, while failures eat away 0.5% of funds. With six trades per month and a 50% win ratio, how much would they possibly make? If 3% per month (minus fees) looks interesting, you will be impressed by annual returns of 36%. However, this pales in comparison with what a day trader could make!

Different time constraints

For day traders, the activity often turns into a full-time job. Profit is largely determined by second-by-second price movements. Thus, it requires:

  • one to two hours of chart analysis
  • two to three hours of active trading

Another factor is the official market hours. For example, a stock market can be open from 09:30 to 16:00 EST. Day trading during these hours is most effective as it is when the biggest volumes are available.

Swing trading requires less time and may be done at any hour. On average, you would need 45 minutes per night to review the charts and manage your positions. Moreover, some nights may be skipped altogether.

Think of swing traders with the longest terms - weeks or months. For them, it is enough to find new trades and update them weekly. Updating trades can be done occasionally - an hour a day or even an hour a week. Swing traders can even open positions after the market has closed for the day.

Similarities: focus and practice

Both modes of trading require concentration and perseverance. It is vital to develop and follow a strategy. Generating profits requires financial competence but this knowledge is more practical than theoretical. Overall, success requires the following:

  • a consistent course of action
  • an optimal number of trades
  • adaptability to fluid market conditions

Knowledge and practice are key. Prices change daily so traders need a flexible approach.

Due to its hurried nature, day trading requires more focus and an ability to remain calm. If you're not disciplined, swing trading may be more suited to you. Although, it has a longer timeframe, it can still be stressful. However, you're not limited to normal market hours.

Copyright 2020. Article made possible by site supporter Mateo Varela of Forex Time

What does the * mean?

If a link has a * this means it is an affiliate link. To find out more, see our FAQs.