i. In day trading, positions are held for a day at max as it only looks to capitalize on daily price swings.
ii. In swing trading, positions are held for a couple of days as it looks to capitalize on longer price swings.
iii. Choose only the one which you are comfortable with.
In day trading, traders buy and sell currencies within the day. All positions are closed by the day's end. In swing trading, traders hold trades for more than a day. Day traders look to capture smaller price movements while swing traders try to capture larger price movements.
Which is better?
I am sure that you have a question in mind whether day trading is the way forward for you or is it swing trading. You might be expecting me to give you a definite answer as to what's right for you. But let me tell you one thing, no one can answer this for you except you yourself.
Day trading and swing trading are two different styles of trading. Both have their pros and cons and it entirely depends on the personality of traders. What worked for one trader might not work for you and what works for you might not work for another trader.
So, what I am going to do here is to lay down everything you need to know about day trading and swing trading and all that you will need to decide for yourself.
I would sincerely suggest that you read everything, sit back, reflect upon it, and then make an informed decision for yourself as to which style of trading is better for you.
What is day trading?
We know that trading is an activity of buying and selling with the aim of earning a profit. We all have traded in some form or another in our lives.
Now, day trading, just as the name suggests, means buying and selling financial assets within the day.
For instance, if a trader takes a long position in GBPUSD at the open of the Asian trading session then he would sell the currency pair and close the position before the closing of the New York session.
Day trading is a particular style of financial trading that is very popular among traders and almost every new trader begins their trading journey by day trading. The traders that indulge in day trading as known as day traders.
What is the purpose of day trading?
The prices of the financial assets are never static. Just when the markets open, till the time it closes, there is always movement taking place in the prices of the financial assets.
Day traders are relatively considered to be short-term traders.
Through day trading they look to capitalize on the price movements that take place within the span of one particular day or one particular trading session.
Now, price movements in the span of one day or session are not always huge. Hence, these traders look to trade with big positions and have small targets.
Day traders may take several trades in a single day but will make sure to square off each and every trade before the day's end in order to avoid carrying trade positions overnight.
Pros of day trading
1. Zero overnight risks
In trading, whatever you do, there is always some or the other risk involved. Our job as traders is to minimize these risks.
In day trading, all positions are closed by the end of the day and no trades are carry forward to the next trading day. Hence, there is no scope for any overnight risk.
Now, what does overnight risk mean? It is the risk that your position is exposed to as you sleep at night and wait for the next trading day to start.
It is often seen that at the opening of trading sessions, prices gap up or gap down. This abrupt price movement could be due to various reasons.
Since day traders are only interested in capitalizing on price movement on that particular day, they have no business in holding trades over a couple of days.
2. Does not require a huge capital
Day trading is a relatively short-term and fast-moving business.
Day traders often take multiple trades throughout the day with larger quantities but with smaller targets.
Some brokers even provide additional leverages for day trades, which traders can make good use of.
3. Increased opportunities
There are thousands of financial assets that can be traded and each of these financial assets will have prices moving up and down throughout the day.
Since day traders look to capitalize on these short-term price movements, they have so many options.
Opportunities in day trading are plenty but it takes the right skill to grab such opportunities.
4. Instant results
We already know that day traders get into trade positions and look to close all of them by the end of the day.
They are not concerned with keeping trades open overnight. Hence, they get their results by the end of the day.
Everything that they did, how much ever they earned or lost in the trading day, they can get all information on the same day.
This can help them take note of their mistakes or shortcomings and they can then work on and improve on them.
Cons of day trading
1. High trading costs
Trading is a business and like any other business, trading too has its costs that traders bear. These costs include brokerage, spreads, taxes, etc.
These costs may seem small and insignificant but at times when they pile up, they can easily eat away the profits. Hence, traders have to take into consideration all the costs that they will liable for.
We know that day traders take multiple trades throughout the day and these trades could either be closed in profit, loss, or even break even. As the number of trades taken increases, the costs also increase.
This is one drawback in day trading, day traders have to manage the costs and ensure that they earn enough to have some profits left after taking costs into consideration.
2. Too much market noise
The prices of financial assets are very dynamic and they seldom are static.
Sometimes prices may move in clear trends or ranges but sometimes the prices may seem to move in a complete haywire manner.
All that day traders do throughout the trading session is to spot short-term trading opportunities and capitalize on them.
Now, prices do move in every trading session, but they may not always make sense.
This means that price movements may not have a clear reason and it would become very difficult for traders to understand its nature.
This is what noise does. There is so much happening that it sometimes becomes difficult to understand what exactly is going on.
Day traders have to figure out a way to ignore the noises and learn to spot what is important and make the best out of them.
3. Smaller profit potential
Day traders are only concerned with the price action of financial assets on the particular trading session or the day.
They are completely oblivious to what may happen tomorrow and all that they care about is what will happen the next minute and throughout the day.
On a given day, prices may only move to a certain limit. It does not happen every day that prices explode in the course of one single day. Hence, these smaller moves only allow traders to have smaller profits.
This is the exact reason why day traders look to take multiple trades throughout the day so that the small profits add up and become significant.
This is one thing that newbie day traders have to learn. You will never make it big with one trade. You need to take quality trades over time to earn decent profits.
4. Over leveraging could be fatal
There are some brokers that provide additional leverages to traders that look to close all of their positions by the end of the day.
Brokers do so as all positions will be close by the end of the day and they are not exposed to overnight risks and they can afford to provide more leverages.
Sometimes traders get out of control when they see such high leverages and they mess things up for themselves.
Leverage is often said to be a double-edged knife. If the trader knows how to deal with it properly then it could turn out to be a boon for them.
But if they fail to do so then it could be the primary reason for their failure.
Day traders come into this business with the expectation of making it big over a short period of time.
In order to fulfill this dream of theirs, they look to max out their leverage limits and get completely exposed in the market.
No doubt if the trade ends up in their favor then they will make a killing.
But if the trade does not go in their favor then they might just blow up their entire trading capital.
What is swing trading?
Just like day trading, swing trading too is all about buying and selling financial assets and looking to earn a profit.
But the difference between day trading and swing trading is the difference in the duration of the trade.
In swing trading, traders look to hold the position or the trade for more than a day. Traders may hold the trades for a few days to a few weeks.
For instance, a trader went short in EURUSD, and by the end of the day, the trade did not reach his target level or take profit level.
In this scenario, the trader will look to hold the trade and not close it by the end of the day. The trade may take a couple of days or even weeks to reach the take profit level.
Traders that trade in this style are known as swing traders.
What is the purpose of swing trading?
In trading in general, swing trading is considered to be a medium-term thing. In swing trading, traders don’t just look to capitalize on price action in a single day but over a period of time.
The primary motive of trading is to earn a profit. In swing trading, the main purpose is to capture a larger movement taking place in the prices of financial assets.
I already mentioned that price can only move so much in a single day, but over a span of a couple of days, the price can explode.
Swing traders may go on to take several positions in different financial assets, with each trade open for at least a couple of days ranging to a couple of weeks.
Pros of swing trading
1. Larger profit potential
We know that swing traders look to capture and capitalize on larger price movements.
They are not interested in capitalizing on small price movements that take place during the course of a single day.
Since they are looking to grab a bigger chunk of price movement, they stand to make relatively bigger profits.
It should be noted that swing trading allows larger profit potential. Emphasize the word potential.
Nothing is guaranteed. Things may not always work out. But when day trading and swing trading are compared, swing trading may just be more lucrative for some traders.
2. Less time consuming
In day trading, traders have to be stuck to their trading desk throughout the trading session to spot trade opportunities and capitalize on them.
This is because the time frames on which the day traders operate are smaller as compared to swing traders.
Swing traders may trade based on higher time frames where candlesticks take a longer time to form. Hence, things are a bit slow with swing trading. This is what makes swing trading less time-consuming.
Traders do not have to be glued to their trading terminal at all times and can also pursue other activities along with trading.
3. Lesser trading costs
In swing trading, the frequency of the trades is lower than that in day trading.
Swing traders take lesser trades overall as compared to day traders.
We know that traders have to bear some costs whenever they trade and costs are directly proportional to the number of trades taken.
Since in swing trading, lesser trades are taken, swing traders do not have to pay a lot in costs.
These costs may look insignificant, but when you look at them from a cumulative perspective then it would seem a bit more significant.
4. Market noise is at minimum
Swing traders are not short-term traders like day traders. Swing trading could be defined as a medium-term thing.
In swing trading, traders get a clearer picture of what is happening in the market as whatever it is that they are looking for, has time to develop.
Since swing traders are in no hurry to take trades, they can allow the buzz created by noise to settle down and let price action become clear.
This just makes all the information better to comprehend and traders can use this to take better quality trades.
Cons of swing trading
1. Risk of holding trades overnight
In swing trading, traders hold the trades for at least a couple of days. This makes them exposed to the risk of price moving abruptly over the night.
Sometimes, this overnight price movement may work in the trader’s favor and may push the price in direction of their target level.
But at times, overnight price movements may cost the trader a lot.
These overnight price movements can be caused due to various reasons and these are out of the trader’s control.
All that a trader can do in such situations is to manage risk properly so that the trade does not become a disaster.
2. It may require a larger capital
I already mentioned that certain brokers look to provide increased leverages to traders that day trade, hence for day traders the capital required could be lesser.
But in swing trading, trades are not closed within the day it was opened, hence swing traders do not get the additional leverages.
This means that at times, swing traders may require a relatively bigger capital to carry out their trading activities.
3. Lesser trade opportunities
Swing traders operate on larger timeframes as compared to day traders. This is what makes swing trading lesser time-consuming.
Swing trading is lesser time-consuming also because there are lesser trade opportunities.
Candlesticks take time to form and patterns take time to play out, hence swing traders have to wait for opportunities to develop.
Now lesser trade opportunities may not be a problem for some traders while some traders may prefer having more opportunities. It all depends from trader to trader.
4. Tests the trader’s patience
Like day trading, swing trading is not a fast-moving thing. The swing trades may take a lot of time to complete and traders may have to wait for long.
Swing trading is one trading style that tests the patience level of traders to its maximum.
This shouldn’t really be a problem for someone who knows what swing trading brings to the table actually and they shouldn’t mind waiting for results.
But for those traders that require quick results, swing trading might be a daunting task.
Which one should you choose?
I am no one to decide which trading style you should choose. And even if you did want an answer to this question then it would be that it is very subjective.
The purpose of this blog post was to lay down everything a trader would need to know regarding day trading and swing trading.
To make things easier for you, I want you to ask yourself some questions:
Question 1 - Are you thinking short-term or long-term?
If you are more of a shorter-term oriented person then day trading will be better for you. Those that are longer-term oriented, they will find swing trading better.
Question 2 - How much time can you dedicate to trading in a day?
If you do not have any other commitments and can spend the entire day to trade, then go for day trading. If you cannot give much time in a day to trading, then opt for swing trading as it requires lesser time.
Question 3 - How fast can you make decisions and can you handle stress?
Day trading is very fast-paced, so will need to be quick to make decisions and will have to deal with a lot of stress. On the other hand, swing trading also requires traders to have quick decision making and stress management but it is less than day trading.
Question 4 - Are you patient enough to wait for things to take place?
I would give more importance to this question as it is very important. In swing trading, you will need to be very patient as it takes time for things to play out in swing trading.
In day trading, things are relatively faster. But this shouldn't lure you into opting for it. It often happens that traders are unable to handle such fast-paced environment.
I want you to spend some time with these questions and really think about them rather than rushing. These questions will make things simpler and clearer for you and you will be able to choose what is best for you.
One thing should be noted that no matter what trading style you choose, you must always manage risk properly and stay in the right trading mindset at all times.
If you require help with other aspects of trading then I’d suggest you read the other blog posts on the website and I believe it will be of great help to you.
What have you decided?
Do let me know about the decision you take and would also appreciate it if you let me know whether the blog post helped you with your decision or not.
If there is anything that you need assistance with then feel free to mention it in the comments section and I will make sure to revert to it at the earliest.
Do share this blog post with every trader you know and allow them to understand the differences between day trading and swing trading.
You never know, it might just help them in taking their big decision.