The trading style used by traders differs based on various factors like profit goals, time limits, and personal capacity. When it comes to trading style, no single technique is better than the rest. But, as a trader, you have to decide on the method you want to use if you're going to succeed in the long term.
So, now you would be wondering what is swing trading vs day trading and which is the right one for you. Let us look at each of the trading styles in every aspect in the swing trading vs day trading comparison below:
Per Trade Profit Expectations
Traders who aim at the rapid increase of returns find day trading attractive. For instance, a trader uses 0.5% of capital as risk per trade. If there is a loss, it will be 0.5%, and in case of a win, the percentage is 1% due to the 2:1 reward to risk ratio present in day trading.
If the trader wins about 50% of all trades, say for a total of 6 trades in a day, there will be an addition of 1.5% to the account balance per day after commissions. A 1% addition will help increase trading account by nearly an uncompounded value of 200% or more in a year.
However, making twice the number of wins when compared to the losses, while winning 50% of the trades made is not an easy task. In day trading, which is mainly position trading, you can have quick gains, and at the same time, there is a high risk of rapidly emptying the trading account.
The wins and losses are slower with swing trading. As in the day trading example above, with 0.5% risks on capital for every trade, the goal is to make about 2% on the winning trades.
If a trader profits 1.5% on the winning trades and loses about 0.5% on the losing trades, with six trades in a month and a profit in 50% of the trades, there is a chance of making a 3% addition to the account balance after trading fees.
In a year, the amount sums to nearly 36%. This is a considerable profit but less than what you can get in day trading.
In short, the profit potential is more with day trading of smaller accounts. However, for larger accounts, it is difficult to use all capital on short term trades. There will be a decline in capital. But, when compared to swing trades, it is still more profitable.
How many day trades can you make in a week or how many trades can you make in a day? The trades you make have a definite impact on your profits and losses.
With day trading, your trades are completed in a day. The frequency can be as small as 4 or 5 trades or as high as 100 trades too. However, if you’re wondering “How many day trades can I make in a week,” then you should know that in day trading, the higher the frequency, the more losing chances you have. Thus, it is better to restrict the trades to less than 5 in a day.
In swing trading, the trades are made every two or three weeks. The longer gap is the time you give the stock to swing to different price points. And, sometimes with stocks posting breakaway gap, you will hold on the timeline and allow the stock to appreciate.
Trading Times Differ
Time is crucial for both trading styles, but it is more so in day trading. You need to spend a minimum of two hours a day on trading and another couple of hours for review of trading charts and preparation.
If you want to spend more time, the trading may take up your whole day. And, day trading has to be done when the market is active and open, which is during specific day time hours.
The difference between day trading and other types of stock trading in terms of trading times is that swing trading does not need as much time investment as day trading. You can spend around 45 minutes or less to know about new trades and execute orders in the present position. However, since the trading takes several weeks or even months, once in a week, checking is sufficient. When it comes to day traders vs long term investors, day traders make trades for seconds or minutes. On the other hand, swing trading is like long-term investing, wherein trades stay open for months and sometimes years.
Additionally, swing trading, unlike day trading, can be done even when the market is closed.
Similar to swing trading, at the end of day trading, trading decisions are taken after or when the markets close or open. It is quite the opposite of day trading.
Money ManagementRegardless of the trading style you use, management of money should be done with the following factors in mind:
- Avoid placing all your money in a single position;
- Margin should be used sparingly;
- Keep stop-loss always open to act swiftly;
- Try to take money from the market; otherwise, you will not be able to cash it.
In day trading, you will be able to use nearly four times of your capital for buying and selling. For instance, if you have 200k capital, you can trade to a maximum of 800k. You have to decide quickly on the money you want to use per trade. You need to understand the margin requirements and track the money you have used for trading. In case of swing trading setups, you can do trading with a maximum of two times your capital.
Different Capital Requirements
The amount of capital needed varies based on the type of stock trades, such as the futures market, forex, or stock. In the US stock market, you need to have a minimum balance of $25,000 for day trading in stocks. However, there is no such minimum limit for swing trading. But, a minimum of $10,000 is needed to make swing trading profitable.
In the case of forex, traders should have a minimum of $500 or $1000 for day trading and $1,500 for swing trading. The minimum amount makes you make a few trades at a time.
For futures, the starting capital is $5,000 for day trading, while it is $10,000 for swing trading. The amount required is based on the margin requirements of the particular contract you trade.
In day trading, you continuously monitor the sales and time streams and keep track of the price movement of the stock via tools like scalping candlestick patterns. With such close monitoring, you can have the pulse of the stock trend and use the stop-loss option, when the situation is not good.
However, the risk with day trading is that the possibility of having more margin will make you exhaust your capital quickly. To avoid this, you have to keep an eye on the margin amount and reduce it as the value of your account increases.
Thus, when you compare day trader vs pattern day trader, you have to ensure a fixed minimum and certain other criteria. Whereas with normal day trading, the general criterion of trading with a capital that you can afford to lose is sufficient.
The risk is different in case of swing trading. The low margin used in swing trading reduces the risk considerably. But, the problem arises with the overnight position holding.
When you consider which is better, day trading or swing trading, swing trading has more risk. Since any market stance altering announcements or recommendations of analysts happen outside usual trading hours, you can find severe fluctuations in the stock value overnight and in the short term that you trade in swing trading.
Since day trading, as the name implies, is a trading process where you see immediate results, it is apt for traders who want to see instant results of their efforts. Furthermore, you can measure your profits on a day to day basis using the day trading chart time frames and have a clear picture of the profits you will make per month or per year.
You have to wait for a longer span in swing trading as the profits depend on the stock price movement over the span. And, you will not be sure whether the profit will increase or reduce over the period.
A Final Comparison
There are different types of day trading, like scalping and momentum trading. In day trading, scalping is used to get more profits in the shortest time frame that ranges from a few seconds to minutes. The targeted profits are smaller to help sustain the probability of justifying large sizes of the position. For scalping strategy, day traders should be ready to use the stop losses and profits.
When compared to scalping vs day trading with momentum, the latter trading looks at capitalizing on bigger movements of stock in a day rather than scalping the stocks for quick profits with large positions.
Is scalping trading profitable or is day trading better?
Scalping trading requires speed and quick decision making and has more setups, high win percentage, and low reward to risk ratios. Day trading is done to find the most profitable spot for selling and buying a financial instrument in a day.
Thus, day traders tend to hold on to the trade for a longer time and use lower ratios than scalpers as profit target is more abundant in day trading. In swing trading, there are two methods, namely shorter- and longer-term or long trades vs short trades. Shorter-term focuses on daily chart and time frame charts, such as 60-minute or 15-minute charts. The broader trading range requires the trader to take a smaller position. In longer-term trading, the price and time frame are larger.
If you like this strategy, you might also be interested in this Gartley Harmonic Pattern Trading Strategy
In Conclusion: Day Trading or Swing Trading
From the above comparisons, you can see the difference between swing trading and day trading. It will be clear that both day trading and swing trading have their own risks, profit probabilities, and pros and cons. While the profit potential is more in day trading, swing trading has better percentage returns.
However, both styles need practice for consistent profits. By using a blend of both trading style strategies, you can have better control over losses. For instance, a trader can begin with scalping of 1000 shares and receive profits on 600 shares. The trade can be continued with the swing position for the remaining shares. Thus, a trader can reduce risk exposure by using a longer holding span.
In the end, what does it take to be a day trader?
If you have unlimited resources and investment, vast experience in trading, and a high-risk tolerance, then day trading is the right choice for you. Day trading is for active and hands-on traders who like more action. On the other hand, swing trading is for those who are in search of an option that does not take up much time or stress.