Forex traders are all in the business of making money, yet the routes of achieving this vary widely. Two consistently discussed approaches in the trading world are day trading and swing trading.
A particular conversation between the two is which approach has a more substantial monetary return. Technically, this is a broad question, and its answer is dependent on a multitude of aspects, primarily skill, experience, capital size, and risk tolerance.
However, in this article, we’ll discern how the distinct philosophies spread across the two determine the extent of profits in forex by studying numerous factors.
The time factor
The first distinction between a day trader and a swing trader boils down to time. Day trading requires a much larger time commitment than the latter. In essence, a day trader operates on the principle of exchanging their time for money and is driven more by producing gains over a smaller period.
In swing trading, we could say one is paid during their sleep because they hold their orders for longer, and the distance of the moves can be considerable. The main challenge of day trading is finding the most optimal and liquid time for a trading opportunity. Although forex is open 24/5, many sessions are not necessarily favorable.
Typically, a vast majority of day traders prefer the London and New York sessions as the biggest market participants are active at this time, which brings about increased liquidity and price movements.
If you want to day trade successfully, one needs to operate on lower time-frames that are often erratic and ‘noisy.’ With a swing trader, time is largely irrelevant. The time for entering a position can occur at any interval as their horizon for holding positions is prolonged.
It doesn’t really make much of a difference whether a trade was placed at 2 am or 4 pm in the markets. With day trading, time matters far greatly since the profit targets are much shorter. Ultimately, a day trader needs to take on a bigger risk to realize the same yield a swing trader could realize but over a more extended period, leading us onto the next factor.
The risk factor
Perhaps the biggest consideration in answering the question of which group is more profitable comes down to risk. It is not to say day traders take on greater risk than their counterparts, though in most cases, they have to.
We’ve briefly mentioned day traders have smaller targets, typically holding positions for minutes or a few hours but never longer or overnight. So, let’s consider a scenario.
The average daily range for several years on EURUSD has been around 100 pips. In other words, this pair will move within this range on a daily basis.
If a day trader was risking 50 pips on this market, the position might stay in the red as the euro might not move much beyond its entry due to its average historical range. Therefore, the trader is forced to use a tighter stop, which comes with more monetary risk.
So, if they decreased it to 20 pips and the market did move 50 pips in their favor, that would be profitable. However, the chance of being stopped out is increased due to natural price fluctuations.
On the other hand, a swing trader could risk the same 50 pips and stay in the position for much longer, decreasing the likelihood of being stopped out. The analogy of volatility works across all markets and is a crucial observation between the two speculators.
So, while day trading can produce a bigger gain in the near term, traders have to put down more to achieve this. As the profit target is much larger in swing trading, they don’t need to put as much money down to possibly produce the same potential gains.
The movement depth factor
Finally, we’ll consider the depth of the movements both traders attempt to profit from, which inherently boils down to the risk to reward aspect. Most day traders never aim for more than a 1:2.
If they scale into their positions, of course, this ratio can increase, though the danger of over-leveraging also magnifies. For now, we’ll stick with individual trades. A swing trader will naturally have a far more tremendous risk to reward ratio, starting from at least 1:3 and going towards 1:6 or sometimes higher.
This is certainly achievable when scanning for opportunities on bigger time-frames like the 4-hour and above; albeit, these are still rare. Day traders will never look at these charts as their horizon is of quicker earnings.
If someone trading intraday wanted to achieve the same reward potential, they would either need a dramatically tighter stop loss or scale into their positions. As briefly mentioned, one can lose very quickly using these approaches.
Final word
In summary, day trading inherently has more monetary potential in the short term, but the risk that needs to be taken is considerable. One of the main advantages is day traders don’t need to wait for long durations to realize a profit.
With swing trading, the potential is more or less the same, though it’s technically less risky since the stop size is larger and the hold time is greater. Once a position is in profit, it’s easier to essentially compound or scale-in when swing trading because one can plan to hold the trade for several days or even weeks.
Regardless of the strategy, the main determinant of someone’s profit size comes down to how much they put down. The primary distinction really is for day trading. The investor needs to take on the bigger risk over a smaller period, while for swing, this isn’t the case.
