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Back to Basics: Day Trading Vs Swing Trading

 

 

So you want to trade, but don’t know which style to choose. Here, you’ll find out how to decide. Day Trading Vs. Swing Trading

Before you start trading, first you should determine how active you want to be. This is one of the fundamental questions which will help pave the way ahead. What are your current responsibilities, and how much time do you have at hand?

Only when you have decided if you want to trade on a daily basis, versus buying-and-holding for several days or weeks, can you truly figure out the trading style that suits you.

Active traders are generally grouped into two camps — day and swing — and there are key differences you should understand as you plot your course. Ultimately, it all comes down to the time frames, technical expertise levels, and your personal choice, of course.

In this article, we’ll take a look at the main differences in the day trading vs. swing trading comparison and see which suits your style. I’ll do my best to help you see which strategy might serve you well, based on your specific goals.

Day Trading vs. Swing Trading

The ultimate end goal for both day traders and swing traders is the same; namely, generating profits. The holding periods — and therefore the technical tools being used — are what makes the difference.

Day trading involves making multiple trades on a daily basis, as the name suggests. According to the pattern day trader (PDT) rule established by the Financial Industry Regulatory Authority (FINRA), investors who make at least four “round trip” trades within five days are considered day traders. Day traders look to profit from price discrepancies. They may get into positions based off technicals, fundamentals, or quantitative reasons. Day traders look to make a living from trading securities and typically don’t hold positions overnight.

By comparison, swing trading involves buying or shorting securities and holding them for multiple days to weeks. Swing traders understand that a trade might take that long to work. Unlike day traders, swing traders generally do not look to make trading a full-time job.

Moreover, you can start swing trading with a small amount of capital, whereas a day trader is subject to the “pattern day trader rule.“

This rule brands anyone making more than four day trades in the same security over five business days as a “pattern day trader.” This is provided that the trades represent more than 6 percent of the trader’s activity in that stretch. Pattern day traders must maintain minimum equity of $25,000 in their account on any day they plan to trade (and must meet that limit before they start trading for the day).

So, Which Style of Trading Should You Adopt?

Day trading vs. swing trading? That purely depends on how you plan to move ahead. There’s no one correct answer that will be applicable to everyone. It’s largely a personal choice, if you ask me. Both the swing trader and the day trader are here to make money — but their styles, ways of working, and expected expertise levels may differ.

If you are willing to invest in understanding technical analysis tools thoroughly and use them to your best advantage for major profits, you might consider being a swing trader. However, you will have to be really good at using these tools eventually. Day traders will also need to be exceptionally good with charting systems and software. You will, in fact, be using them much more frequently.

Consider checking out the RagingBull resource on technical analysis tools and how to interpret them for a better understanding of these key concepts.

 

Day trading promises more profits in general. This is especially true of small accounts. However, experts are divided in their opinion in that many believe swing trading, with its wider timing window, has more potential for profits.

You should also consider the amount of time you are willing to put in for your trading activities. Day trading is usually a full-time endeavor, as you’ll need to be studying charts and managing trades for quite a lot of time every single day. On the other hand, you can do with much less time at your disposal when swing trading.

Another aspect to consider is that day trading usually involves working with margin, i.e. borrowed capital. Trading on margin enables day traders to maximize their profits, but it can also land them in the red rapidly if the strategies go wrong. Compared to day trading, swing trading is less risky. However, this does not imply that swing trading is entirely risk-free. In fact, there’s a lot of scope to lose here as well, if you’re not careful enough.

Beginners are generally much better off swing trading than day trading. This is because the latter will put you in direct competition with major investors who use cutting-edge technology and software to stay on top of their game. Swing trading, however, requires nothing more than a basic computer and free software. There are literally thousands of free resources that you can use to your advantage.

Ask Yourself: Are You Willing to Give What It Takes?

When comparing day trading vs. swing trading, you need to know the level of commitment each of them requires of you. Day trading is usually a fast-paced activity. You’ll need to make quick decisions to fare well; it’s an action-packed thing. If you like to take breaks every now and then and work at a relaxed pace, you should consider swing trading instead.

As you will have guessed, day trading can be a stressful experience if you’re not prepared and mostly uninitiated. You have to be highly watchful of market movements as and when they happen— there’s a lot at stake. If you prefer working in relatively calm and slightly less demanding environments, swing trading might be a better option.

This, by no means, implies swing trading is less stressful or has lower risks. It’s just that it is much better suited if you do not have the experience and are just starting out in the trading world— you get the message.

 

Here’s When You Should Choose Day Trading

Check out these main points to summarize when it might be ideal for you to be a day trader:

  • You meet the capital requirements necessary to satisfy the FINRA pattern day trader rule and SEC rule, if and when these are applicable to your case.
  • You are ready to study up-to-the-minute trends and take necessary action at a rapid pace.
  • No day is ever dull for you and you seek that adrenaline rush every minute.
  • You are diligent, disciplined, and strong-willed.
  • You do not stress over things easily and most importantly, can manage stress really well.
  • You understand the risks associated with making major losses and ending up in debt, especially if you’re trading on margin.
  • You have the knowledge and expertise needed to make stupendous profits that characterize day trading.
  • You are ready to make small profits on a day-to-day basis by making small trades.

Here’s When You Should Choose Swing Trading

If the description below rings a few more bells, it might mean that a swing trading strategy is a better choice for you.

  • You are ready to wait from a few weeks to months while studying market movements.
  • You are already into a full-time job and do not have a lot of time to spare for your trading activities.
  • Constant monitoring is not your cup of tea. You do not want to keep babysitting market moves every single minute.
  • You want a less stressful life with reduced risk levels compared to day trading.
  • You do not want to only rely on making a living trading stocks.
  • You do not have a lot of capital available to invest.
  • You do not yet have advanced levels of technical trading knowledge.

The Bottom Line on Day Trading vs. Swing Trading

When you’re comparing day trading vs. swing trading, you have to first decide what kind of trader you want to be. Only you can make that decision. If you’re ready to “drop everything” and focus on the markets, you can be a day trader; if you don’t see trading as your full-time career, consider swing trading and learn about how to protect yourself during those short times when your attention is focused elsewhere.

Both day trading and swing trading will require you to be vigilant at all times, but the day trader will have much shorter time windows to respond — and respond correctly. The experience can quickly get on your nerves and you will definitely need more experience and knowledge to get things working.

Swing trading, on the other hand, is quite manageable as a part-time endeavor. You do not have to practice it full-time, although it is entirely possible to do that if you are really serious about studying market movements.

Once again, remember that the day trader vs. swing trader decision is absolutely dependent on your personal preference and choice of lifestyle. It is also dependent on your level of expertise and the skill set you possess.

Whichever route you decide to take, we recommend using online resources on technical analysis, which will help you to master some of the available tools for the job.