Swing Trading vs Day Trading: Which Strategy Is Better?
If you're a newbie like most traders, you're probably wondering how exactly to start in the market. Thinking of getting into the forex market? The stock market? If you want to trade futures instead, you need to know if you're going to participate in day trading or swing trading. What you need to know is that day trading and swing trading have some things in common. They also have differences. In this article, we're going to discuss the differences when it comes to profit, appeal in the market, and risk to reward ratio. Let's get right into it then, shall we?
Is Swing Trading More Profitable Than Day Trading?
To determine which trade has more profit than the other, there are a few factors that would be taken into consideration. However, in general sense, day trading is potentially more profitable than swing trading. One of the factors to consider regarding profits is the time factor. Unlike day trading, swing trading takes time. It involves making trades over a few days, weeks, or even months. You can make up to five day trades in the time you make one swing trade. Due to how slow swing trading goes compared to day trading, the profit and losses all accumulate slowly. This is unlike day trading where it all happens quickly. It's important to note that swing trading taking more time than day trading doesn't mean the losses in swing trading can't be substantial. Most swing traders make more money than day traders and some swing traders also lose more money than day traders. (Got it?) Some swing traders can rake in enormous and irrecoverable losses more than day traders. Day traders also generally tend to have more active trading hours than swing traders. This makes them more committed, thereby increasing their profit potential.
Is Swing Trading Safer Than Day Trading?
It's without a doubt that every form of trading has its underlying risk. In fact, the higher the risk, the higher the profit altogether. Day trading is about making small trades in a day so the losses are inherently lower than that of swing trading. However, consistent losses in day trading can quickly add up and before you know it, you're losing a lot of money. And that's before you include the taxes and transaction costs. Swing trading on the other hand requires a huge investment that would be monitored for days, weeks, or even months. The time frame in this instance allows a swing trader to make both massive profits and massive losses.
Since there are risks in the two types of trading, you have the right to choose. How much profit you want to make depends on how much risk you're willing to take. Factors such as market movements, newsworthy events that can affect the price, whatever risk management strategy you have in place, and finally your skill and experience as a trader should all be considered to determine your style of trading. In other words, there isn't a safer trading style. It all comes down to how much risk you want to take.
Is Swing Trading Really Profitable? What Is a Good Profit Margin For Swing Trading?
You might wonder if swing trading has that much profit. Like we've said earlier, swing trading takes more time, so the profits and losses accumulate slower than day trading. If you decide to be consistent, however with your trades, the slow profits can accumulate into something substantial at the end of the year. Let's do some analysis
The general profit goal in a typical stock position is 20 to 25% for most of the stocks. Swing trading, however, targets smaller profits. This means 10% or sometimes, 5% when the market is tough. Now, these profits might look small but what makes them compound is the time frame. As time goes on, these profits would add up and turn into incredible gains. Let's say you conform to a 5% gain in a week, this would ultimately lead to at least 20% gain overall in a month or more. Sometimes, the gains can even be up to 10% per week. Ultimately, they all add up and become significant profits. You have to make sure you also consider losses. A 3:1 profit to loss ratio is a good start.
Swing trading definition, The Amount of Money Required to Start Swing Trading
Swing trading is a popular trading strategy that involves the shorting or buying of assets(financial) and then the holding of such a position with the underlying assets for a few days. Unlike day traders, swing traders don't perform little trades, their goal is to maximize a long-term profit. This means they make investments that could last for several days and then go all in. This trading strategy is mostly recommended for less active traders and people who are comfortable leaving their trades open for days. All in all, swing trading gives you more profit potential (because let's face it, day traders lose more money than swing traders even though there's more profit in day trading). You can aim for a 20% profit margin or even more per month. Since there's more time in swing trading strategy, you get to open yourself to possibilities of earning more or losing more.
How much do you exactly need to start swing trading? Again, we're going to do some analysis.
A full-time day trader's cash to expenses ratio is calculated at 50:1. This however can be altered a little by those who make money through other means. If your monthly expenses are around $5,000 a month, you would need to have $250,000 in your account before you can start any kind of trading. The whole point of this is to make sure you can trade without losing all your money. Among other things, you have to determine the trading tools and software you use. Another thing that makes swing trading preferable is that you get to keep your job since it doesn't require a lot of active hours (one hour per day, tops, just to check the movement of your investment).
Day Trading Definition, Pros, And Cons Of Day Trading
Day trading is the form of trading in which you do in the day. This means the goal is to have all your opened trades closed by the end of the day. The goal is to make consistent profits on all these trades before you close them. This is a popular style of trading among wall street traders who saw the prices of stocks of companies like AMC and Gamestop rise within a few moments. There are a few differences between swing trading and day trading. One of them is time as we've explained before. The time required in swing trading is nothing compared to the time required in day trading. You have to be more active on trading platforms if you're a day trader. Another difference is overnight risks. As a day trader, you don't have to worry about losing money overnight since you're closing all your trades by the end of the day. If there's a major event overnight, a swing trader is likely to lose or gain money when he's asleep. Finally, day trading is more expensive than swing trading, especially when you use a broker that charges commissions. Since a swing trader can only open 1 - 2 trades at the same time, his transaction and commission costs won't be as much as that of a day trader who can open more trades in a day.
When it comes to the pros and cons of day trading, there are a few we'd like to discuss with you.
Absence of overnight risks: As said earlier, a day trader makes sure they close all their trades before the day ends. This reduces the chance of any kind of overnight risk.
Absence of overnight fees: Overnight fees, also known as swaps are often charged by some brokers. Swing traders are likely to pay overnight fees, unlike day traders.
Opportunities: As a day trader, you're more likely to encounter more market opportunities than a swing trader. This generally makes trading more fun and interesting.
Time-consuming: Being a day trader means you have to be active at all times. This would take a lot of your time and can prevent you from attending to any other commitment you may have.
Generally riskier: since this strategy involves overtrading, there's the involvement of greater risks.
Expensive: if you use a brokerage firm that takes commissions, day trading would be more expensive for you. This is because you would have to pay commission fees every time you open and close a trade.
We hope you can gain one thing or two from this article (apart from profits). Remember that at the end of the day, the choice is ultimately yours. You determine which strategy you would like to go with. Have a nice day and trade safely.