Day Trading vs. Swing Trading

By: DailyForex.com

What are the differences between day trading and swing trading? Is either trading style a good idea for you? Forex terminology is often thrown around incorrectly in a way that misleads newer traders wanting to educate themselves. In this article, I’ll explain what these two trading styles are, and the pros and cons of each.

Day Trading

“Session trading” might be a better term to use than “day trading”, as a key definition of day trading is that trades are typically all opened and closed within a single trading session. The trader sits down and starts flat and then walks away flat again, with no trades still open. In fact, day traders might typically leave a small portion of a very profitable position to run “overnight”, but this would usually be only a small fraction of the typical size of the “daylight” or actively managed position which it originated from.

Day trading is very time intensive. It requires tight, active trading on small timeframes such as 15 minutes, 5 minutes or even 1 minute, and can be very stressful, difficult and challenging – and potentially very rewarding. It requires tight focus, at least periodically throughout the trading session. It requires at least some degree of focus for the duration of the entire trading session.

Day traders might use any of a wide variety of trading strategies, but what all day traders will typically have in common is seeking a series of relatively small winning trades, with gains ranging from just a few pips to at most perhaps a 1.5% movement in price as a best-case winning trade scenario. Stop losses with therefore typically be tight, even very tight.

If you asked a large sample of day traders why they think it’s a good idea for them to be day traders, the most popular answer would probably be that day trading gives them the opportunity to trade in an extremely nimble and flexible style which helps them to maximize profits.

Swing Trading

Swing trading” gets its name as a trading style because these traders are trying to benefit from the natural “swing” of an instrument, i.e. its price cycle. Rather than being focused on an exact time, these traders try to spot the beginning of a directional price movement, enter a trade, and hold on until the movement dies out, when they take profit. Swing traders are prepared to hold trades open for several days or even a few weeks, if the “swing” keeps going that long. Day Trading or Swing Trading

Swing trading is typically less time intensive and is usually practiced on higher time frames than day trading: 4 hours is the most common time frame used, although some swing traders will make decisions based upon 1 hour charts or even use lower time frames to fine-tune their entries and exits on occasion. One of the major attractions of swing trading is that it can be practiced by checking prices only once every four hours, which many full-time employees can integrate into their work and leisure time. Obviously, swing trading typically requires far less time and effort than day trading.

Swing traders are usually looking larger gains from price movements of between 1.5% to 5%, using commensurately wider stops to account for volatility inherent to 4 hourly or hourly price movements. Swing traders typically use trend following or support and resistance style trading strategies, often supported by fundamental analysis as they are trying to catch larger price movements.

If you asked a large sample of swing traders why they think it’s a good idea for them to be swing traders, the most popular answer would probably be that swing trading gives them the opportunity to make just as much money as they possibly could by trading, yet with far less stress and effort, while being able to keep their full-time job which hopefully provides some financial security.

Should I Be a Day Trader or a Swing Trader?

A large part of this decision is no real decision at all, because it is determined by economics and time. Most people need to work full-time to meet their financial obligations and even good traders will report wide fluctuations between their gains and losses over the course of time. This means that almost everyone can rule out full-time day trading as a realistic possibility. It might be that you have some time, perhaps a couple of hours, which you could dedicate exclusively and intensively to trading every day. However, you must ask yourself whether this is the “right” time – if it does not correspond with either the Tokyo, London or New York openings, it won’t be. Furthermore, you will meet more market opportunities being plugged in once every few hours continuously, then you will by being plugged in for a couple of hours each. This is just the way the market works.

If you are really determined to become a day trader, I think most day traders would agree with me when I say that if you can’t master swing trading, you won’t master day trading, so that should make it clear what style you should start with, at least.

Adam is a Forex trader who has worked within financial markets for over 12 years, including 6 years with Merrill Lynch. He is certified in Fund Management and Investment Management by the U.K. Chartered Institute for Securities & Investment.