When we think of the common trading styles, day and swing trading tend to top the list; and for a good reason. Both techniques are simple to understand – one method is more active while the other is less active.
The main difference is quite simplistic, however, since there are other considerable nuances between the two worth observing. Like anything, no strategy is intrinsically better than another. Each offers its unique benefits and drawbacks and will suit traders in different ways.
What is day trading?
Day trading is a popular style of speculating in the markets by attempting to profit through executing numerous positions held for short periods in a trading day. Another distinction with this style is day traders rarely let their orders run beyond the day for fear of overnight risk.
The average day trader will look to open anywhere from at least three orders or more daily, especially around the busiest trading sessions of their chosen markets. The aim is usually for small profits that hopefully accumulate over time.
Day trading proponents base their strategies on lower time-frames, typically the 1-hourly charts and below. It’s easy to see the allure of day trading as it seeks to make considerable gains in the short term. Due to the high trade frequency, there are numerically several profiting opportunities.
While this attribute sounds wonderful, some red flags with this approach exist; namely, the stress traders face, the time consumption, and trading costs.
What is swing trading?
Swing trading is also a popular methodology of speculation in the markets. It seeks to profit from price ‘swings’ over several days to weeks. One of the attractive points of this methodology is where it sits between day trading and position trading or buy-and-hold strategies.
This approach is not too short-term but not too long-term either. Compared to day trading, the trade frequency is tremendously reduced, where the average swing trader should expect a few opportunities during a week.
Practitioners of this style will use higher time-frames starting from the 4-hourly and above. Though the trade frequency is lower, causing far less anxiety, this is also a detriment since profiting fortuities aren’t plentiful.
Also, this approach requires an immense level of patience, and potential incurring swaps can accumulate for holding trades overnight.
Pros and cons of day trading
Overall, scalping is too fast for some, while swing trading may be too slow; day trading sits between the two. Let’s look at the main pros and cons of this approach.
Pros
- Plentiful trading opportunities: This point is one of the main attractions for day trading as it offers more chances for traders to make money. Something else about this attribute is the wait time between trade set-ups is not so long.
Even if a trader misses a set-up, there is usually always another one coming soon.
- No overnight risk: Because day traders should close their positions before the end of the day, they are unlikely to incur any possible negative swaps. Another potential overnight risk is the widening of spreads during the rollover period.
Depending on the traded instrument, gaps that might occur during the weekend could be a concern for some.
Cons
- With a lot of screen time, it can be stressful and too rapid as the trader deals with the emotional challenges of constantly engaging in the markets.
Trade frequency doesn’t necessarily correlate with high-profit potential: It’s the classic argument of quality over quantity. We should remember a day trader aims for small, compounding profits.
Of course, the profit capacity depends on the risk on a given trade. So, although opportunities are abundant, it’s easy for one to blow their account by overtrading.
- Exposure to slippage and accumulative execution costs: Let’s start with the slippage. Although this phenomenon doesn’t occur often, there is an increased chance of it happening during the busiest periods, which is when day traders typically execute. On the one hand, it can be positive, but in other cases, it can lead to unfavorable order fills and wider spreads. Regarding execution costs, spreads can still be an issue if the profit targets are low. Depending on the account and broker, any applicable commissions may add up to a sizable amount over time.
Pros and cons of swing trading
Analysts consider swing trading a far less demanding and potentially more lucrative endeavor than day trading. But what about the drawbacks? Let’s have a look.
Pros
- Lower time consumption: Unlike its counterpart, swing trading is very flexible in time dedication, allowing for more freedom. The average trader here doesn’t spend anything above an hour (or sometimes less) looking at the charts daily, resulting in a lower execution regularity.
This attribute compliments anyone with a job or business or looking to spend their time elsewhere while having the prospect to profit. From an emotional perspective, this application comes with far less stress since the pace is slower.
- Offers the chance for long-term compounding: Since swing trading relies on holding positions for several days to weeks, it provides someone the best opportunity for big moves.
These moments are rarely possible with the alternative as the profit targets are lower. For instance, a swing trader could aim for a risk-to-reward of 1:10, while a day trader may look for 1:2 or even 1:1.
Cons
- Requires incredible patience: For some, patience might be their downfall since it’s an inherently difficult character trait to possess. The wait time for a trade set-up can last for several days.
Additionally, a swing trader has to withstand large price fluctuations once their orders are live.
- Overnight risk: Opposite to day trading, these traders have to deal with potentially negative swaps that can add up considerably as the hold time of positions increases.
However, in some circumstances, this can be positive; though one will want to assume the worst first. It’s the same mindset for gaps that could occur during the week and on weekends.
Final word
There is a lot to consider when deciding between day and swing trading. The decision comes with experience as some traders could switch between the two at some point in their careers.
Regardless of the decision, no style is necessarily better than the other because it depends on many variables.
Ultimately, those who can contend with the frantic nature of the markets and have lots of time on their hands are likely to choose day trading. Conversely, people with a preoccupied lifestyle and are inherently patient should consider the alternative instead.
