Which is More Profitable? Day Trading or Swing Trading?

Which is More Profitable? Day Trading or Swing Trading?

1. An Introduction to Day Trading and Swing Trading

2. Which is More Profitable? Day Trading or Swing Trading?

3. Day Trading Vs. Swing Trading: Key Differences

4.  The Final Verdict: Day Trading or Swing Trading

1. An Introduction to Day Trading and Swing Trading

The Internet and technology have made it much easier for businesses and individuals to profit from trading. Considering online trading could provide you access to a world of opportunities but venture into something like this demand knowledge and practice. Online trading is a fairly popular method of transacting in financial instruments such as stocks, commodities, ETFs, bonds, futures, etc. It can be a good way to make money if you have extensive know-how and experience.

Though online trading has become extremely popular, the method on which a trader opts to trade can significantly impact trading profitability. Active traders often group themselves into two categories: the day traders and the swing traders. Both methodologies aim to make a profit from short-term profits based on price movements in the market. However, they have their own set of pros and cons that we will discuss in this article.

Let’s start with understanding the two terms: Day Trading and Swing Trading…

What is Day Trading?

The simple definition of day trading is the buying and selling of different financial instruments to make a profit on the same day. In this method, positions are rarely (if ever) held overnight and there are several different styles of day trading. Most day trading systems can have open positions for anywhere from a few minutes to a few hours as this trading system is extremely flexible.

As far as the main day trading markets are concerned, they include options, futures, currencies, and stock markets.

What is Swing Trading?

Swing trading is a speculative strategy in financial markets that focuses on taking smaller gains in short-term trends. A tradable asset is held for one or more days to make a profit from price changes or swings. The position in this methodology is typically held longer than a day trading position. The average length of a trade is more like 5 to 10 days and a trader can make a lot of small wins to earn big overall returns.

As far as the investment portfolio of swing trading is concerned, the right stocks are large-cap stocks or most actively traded stocks on the major exchanges.

2. Which is More Profitable? Day Trading or Swing Trading?

Day trading and swing trading are both popular trading methodologies but the question investors often ask is which is more profitable. Well! One trading style isn’t better than another as it depends on an individual trader’s circumstances. For some, day trading works best while others opt for swing trading to make profits.

If you’re perplexed about whether to go with day trading or swing trading, the following comparison might help…

Day Trading

Day trading involves using technical analysis and charting systems to make dozens of trades in a single day. The main objective for opting for this method is to trade financial instruments to make small profits on numerous trades. This helps the traders to cover losses on unprofitable trades as they can make money small profits from trading stocks, commodities, or currencies. In this method, the traders do not keep any positions or own any securities overnight.

The following points might help understand day trading better and see if it is profitable than swing trading…

- Day traders have to spend heavily on trading tools and equipment such as a trading platform, high-configuration computers, charting software, etc.

- The competition level is extremely high as day traders have to compete with high-frequency traders and other experienced market professionals.

- Though traders work independently on their terms, they may need to do this as a full-time job which means giving up on a steady monthly paycheque.

- A day trader needs to watch multiple screens to spot trading opportunities which make this method a bit hectic as there is a requirement for such a high degree of focus.

- Day trading does not require an expensive education or a special degree but having its basic knowledge will help in technical analysis and computerized trading.

- As day trading involves sitting on the computer screen the entire day, it may require a very unique skill set that can be difficult to master.

Pros:

- No Overnight Risk: As positions are not held longer, there is no overnight risk involved.

- Less Capital Requirement: Day trading requires less capital as compared to swing trading.

- Faster Compounding Earnings: The earnings made on the earlier day can be used the next day for trading.

Cons:

- Trading Strategy: There is a lot of pressure to get trades right and it may require opting for a very good strategy.

- More Commissions: As there is more trading involved, the traders may need to pay more brokerage or commissions.

- Time-Consuming: Day traders need to devote a lot of time in front of the screen and use multiple screens.

Swing Trading

Swing trading involves identifying price movements in stocks, commodities, and currencies that take place over days or weeks. In this method, trading may take a few days to a few weeks as the trader is not likely opt for it as a full-time career. The main objective is keeping a trade for an asset open for a few days or even weeks for enjoying higher profits. Since this methodology involves holding positions at least overnight, the requirement of margin is also higher.

The following points might help understand swing trading better and see if it is profitable than day trading…

- Swing trading involves keeping a trade for an asset open for a few days or weeks which means you can enjoy higher profits but there is also the risk of larger losses.

- A swing trader can set stop-losses but there is also a risk of a stop being executed at an unfavorable price which is not the case with day trading.

- Swing trading does not require multiple screens or a lot of tools as it can be done with just one computer and conventional tools.

- Identifying swings or fluctuations in stocks, commodities, and other assets may take a few days to a few weeks to work out.

Pros:

- Larger Target: Swings traders are not looking to make a small profit but an overall good trade.

- Time: It requires two-three hours of trading in a day which means traders are free for the rest of the day.

- Market Analysis: Traders can check the market a couple of times a day or a week.

- Low Risk: As fewer positions are opened, traders are less open to risk.

Cons:

- Overnight Risk: There is always a risk of leaving the position open overnight.

- Patience: As swing trading involves keeping positions for weeks or even months, it requires patience.  

3. Day Trading Vs. Swing Trading: Key Difference

There are many differences between swing and day trading and here we’ve discussed some of the main ones…

- Effort Required: As day trading requires you to give your firstborn during trading hours, it will be hard to get even a tiny break. On the other hand, swing trading allows you to take a breath as you don’t need to keep a check on the screen constantly.

- Profit Expectations: Day trading is done on a much smaller time frame which means that a trader expects a good profit and wants to be successful over the long haul. However, swing traders expect a much larger profit potential.

- Number of Trades Per Day: Day trading involves opening and closing trades during the same day while swing trading does not require you to place trades daily. Day trading allows trading as few as once per day up to hundreds of trades.   

- Money Management: Day trading allows you to use up to 4 times of available cash to trade while swing trading allows a maximum of 2 times of available cash. Day trading needs you to make quick decisions on spending money while swing trade is quite flexible.   

- Risks Involved: As day trading involves constant monitoring, it provides better control over your trading activity. On the other hand, swing trading also involves less risk as you have less margin to use per trade but your trades are exposed due to holding positions overnight.

- Sense of Accomplishment: Day trading allows you to enjoy an immediate sense of accomplishment as you can see the results of your trade the same day. However, this is not the case with swing trading but it allows you to make higher profits.  

4. The Final Verdict: Day Trading or Swing Trading

In a fast-moving market, it is imperative to choose your trading method wisely. Whatever method you choose to trade, day trading or swing trading, you should determine how active you want to be. The answer to this basic question will help you pave the way ahead and choose an appropriate methodology. Once you have decided if you want to trade daily or hold positions for several days or weeks, you can figure out the best trading style.

The ultimate end goal of both methods is the same: making good profits and what differs is the holding periods. Your choice will depend on a few things including the time you want to dedicate, the money you have to trade, the risk you can afford, and the skill-set you have. The answers to these questions will help you determine what will work best for you.