Understanding the nuances of swing trading versus day trading

Day trading is a good way of leveraging limited capital and trading with short stop losses and short profit targets. Day trading is all about rules, trends and discipline. Since day trading does not involve delivery, the brokerage charges are much lower.

Jul 22, 2018 10:07 IST India Infoline News Service

Day trading is quite well understood. It is better known as intraday trading or the creation and closure of positions on the same day. Day trading is a good way of leveraging limited capital and trading with short stop losses and short profit targets. Day trading is all about rules, trends and discipline. Since day trading does not involve delivery, the brokerage charges are much lower. Also, if you place an intraday order with stop loss and profit target imputed (cover order or bracket order), then you can get higher leverage. Let us first understand day trading in detail.

What is day trading all about?
Day trading, as the name suggests, involves making dozens of trades in a single day, based on technical analysis and sophisticated charting systems. The day trader's objective is to make a living from trading stocks, commodities or currencies, by making small profits on numerous trades and capping losses on unprofitable trades. Day traders typically do not keep any positions or own any securities overnight. Therefore, day trading, involves a unique set of skills that focus more on speed, ability to grasp momentum and employing trading discipline. The thrust in day trading is all about churning the capital fast with a positive risk-reward ratio so that the Return on Capital can be maximized; net of costs. Remember, when you are churning the portfolio rapidly the costs matter a lot and make a big difference to the economics of your day trading activity.
How Swing Trading is a different ball game
While day trading focuses on initiating and closing out the positions intraday, the focus of swing trading is more on identifying an underlying trend and play along much longer. You may have seen stocks that show rapid movements in a short span of time. Even large stocks like Bajaj Finance, Ashok Leyland and Titan move rapidly when the momentum is either in their favour or against them. But, such movements do not happen intraday and the positions need to be held for slightly longer. That is what the swing trader must be prepared for. Check out the price chart of HPCL versus Brent Crude.

 Chart Source: Bloomberg
What can you gather from the 1-year chart of HPCL? The stock of HPCL moves exactly like a mirror image of the price of Brent Crude in the international market. That is because a fall in price of crude is positive for HPCL because it reduces the probability that the government will ask these downstream oil companies to bear the burden of oil subsidy. What does that mean for swing trading? Since oil is a commodity, it typically moves like a commodity and is influenced by the forces of demand and supply. That makes oil more predictable in terms of price movements. A swing trader can identify such short term swings in the price of crude oil and then use them to take short term positions in HPCL. This is an example of how swing trading works in practice. Typically, the swing trader will also look at a number of technical factors like supports, resistances, moving averages and oscillators before getting confirmation of a swing trade.
How day trading differs from swing trading
Broadly, there are four ways in which day trading differs from swing trading. These have implications for the economics of your trade.
Structure of the trade: In an intraday trade, the trader uses more of a top-down approach. The focus is more on getting the broad momentum of the market right and then trade individual stocks accordingly. The swing trade is lot more bottom-up. Like in the case of HPCL illustrated above, the focus is on the stock/index and the macros are used to ratify.
Returns from the trade: Obviously, the return potential on a swing trade is higher than on an intraday trade. Discipline puts quite a few restrictions on an intraday trade and hence the trader does not have the leeway to capture the complete price move potential. Swing trade does not have any such constraint.
Risks in the trade: As a logical corollary, it follows that the swing trade is riskier compared to a day trade. Since the day trade is executed with very tight stop losses and profit targets, the total risk can be cordoned off. Swing trade, on the other hand, is more of a directional bet and can be on the long side or the short side. This exposes the swing trade to overnight risk. Also margins are higher in case of swing trade and that also locks a bigger chunk of your capital in these trades.
Directional versus agnostic: A day trader is normally indifferent to the direction of the stock and the market and is willing to trade the same stock on the long side and on the short side the same day. The swing trade is focused a lot more on interpreting swings and emphasizes on catching swings at the top or at the bottom to make the best of the trend.

Related Story

Open Free Demat Account (Rs699)
Open ZERO Brokerage Demat Account

  • 0

    Delivery Brokerage for Lifetime

  • 20

    Per order for Intraday, F&O, Currency & Commodity