Day Trading vs Swing Trading
Market participants can gain from the market in two ways: investing and trading. When buying securities and holding them for the long-term helps in building wealth, trading in the market can help the market players to gain from short-term volatility. There exist various trading methods including standard trading, momentum trading, intraday trading, swing trading, and so on.
What’s the difference between day trading and swing trading?
Day trading involves buying and selling financial securities within the same trading day. The day traders exit their positions before every market closes. They look for profit from short-term market volatilities rather than holding the securities for the long term. The difference between buying and selling price becomes their profit.
For example, Ritik bought 200 shares at Rs. 20 per share, when the market opened, on 20th April 2022. After one hour, the price started increasing and he decided to sell those shares at Rs. 23 per share. On the same day, he made a profit of Rs. 600. After two hours he again bought 100 shares at Rs. 15 per share. Though, this time the price started declining and is expected to decrease more the next day. Therefore, he sold those shares at Rs. 13 per share, losing Rs. 200, on the same day.
Swing trading is another short-term trading style where traders hold the securities for longer than a day; they exit their positions within a few days or weeks. Swing traders tend to leverage shorter price swings. They may use a combination of fundamental analysis and technical analysis to evaluate the security.
For example, Romil is a swing trader. He bought the stock at a bullish signal above the recent high of Rs. 550, and set a stop-loss at the recent low of Rs. 535. He found the stock increasing in the two weeks, and an opportunity to gain Rs. 45 per share. He checked the fundamentals to strengthen the trade. After evaluation, he sold the stock with Rs. 45 per share profit.
The below-mentioned points highlight the day trading vs swing trading.
Trading frequency: One of the key points in day trading and swing trading comparison is trading frequency. Day trading involves entering and exiting multiple trades within a single trading day. Swing traders open and close multiple positions over a few weeks. Therefore, trading frequency is higher in day trading as compared to swing trading.
Periods: Day traders take positions in the financial securities for a very short horizon as compared to swing traders. Day traders aim at capturing each profitable opportunity within a day. However, swing traders hold the securities for a time being and look to make a profit from market movements within that short period of weeks or months.
Day trading is more of a full-time job. Day traders are required to constantly track the market movements to spot profitable opportunities. Usually, they spend three-four hours trading. In contrast, swing trading requires less dedication and time daily.
The number of transactions:
Day trading involves more number of transactions as compared to swing trading. Day traders make plenty of transactions daily, whereas swing traders enter the transactions and exit after a few days or weeks.
A large number of frequent transactions result in higher costs due to brokerage. Therefore, day trading involves higher costs as compared to swing trading.
For example, if a trader bought shares three times within a day, each time he will have to pay the brokerage. Swing traders buy the shares and hold them for two weeks. They will have to pay the brokerage fee a single time.
When swing trading only requires traders to have a brokerage account, the day traders need to have specialized trading software in addition to the brokerage account.
There is no concrete strategy to make higher profits. The main difference is day trading occurs with small profits or losses on every transaction. When it is accumulated, the exact profit can be tallied. In swing trading, on the other hand, each trade can incur either higher profit or losses.
Day trading is suitable for those traders who can make quick decisions. Additionally, it is suitable for traders who can dedicate most of their time to trading. Day trading is also less beginner-friendly.
Traders with less trading experience can choose swing trading. Moreover, traders who cannot dedicate more time to trading can opt for swing trading.
There is no thumb rule for minimum capital required for day trading or swing trading. One can start with Rs. 5000, or 50,000 or 5,00,000 depending on your budget. A trader should have enough capital to cover the price of a security. The capital requirements depend on the type of financial security being traded, for instance, stock, currency, commodity, derivatives, etc.
For day trading futures, traders must have minimum margin requirements as defined in the contract. It is advisable to have more than the minimum required amount in the account to perform multiple trades.
Which is right for you?
Trading in the financial market inevitably requires knowledge and skills. Day trading and Swing trading both have their benefits and risks. Which trading strategy you use depends on your investment goals, skills, knowledge, and experience.
If you are trading in the market for a long time, you are more likely to know how the market works. Additionally, if you have quick decision-making skills, high-stress tolerance, risk-taking attitude, passion, and time to dedicate to trading, you can choose day trading.
On the contrary, if you have recently begun your investing journey, swing trading is a better option than day trading. Moreover, if your stress tolerance level is lower and you need more time to make a decision, swing trading is more suitable. Besides, if you cannot glue to a computer and market for most of the market time, but want to gain from short-term market movements, you can go ahead with swing trading.
To wrap up, day trading vs swing trading is important to understand which trading method suits you best as a trader. Though both the trading methods are for the short-term, the holding period in day trading is much lower. However, swing trading requires fewer efforts from the trader’s end than day trading. Both the trading styles possess their own sets of benefits and risks. Ultimately, the right strategy and proper research set one winner in the stock market universe.
Frequently Asked Questions Expand All
Though swing trading is not entirely safe, the risk involved is lesser than day trading. The main reason is traders have more time to make decisions in swing trading than in day trading.
Swing trading and intraday trading both have their benefits and risks. The answer to which one is better depends on your time frame and risk preference. Day trading is suitable for those traders who can invest more time and are ready to take more risks. If the traders cannot track markets constantly, swing trading can be a better option.
The traders may get lured by the returns of swing trading, making a living off swing trading is highly circumstantial. Depending solely on the swing-trading is not a good way.
Although the returns depend more on how the market reacts in the trading period, the swing traders can make average returns between 10-40% annually, if chosen the right strategies.