Day Trading vs. Swing Trading: An Overview

Active traders often group themselves into two camps: the day traders and the swing traders. Both seek to profit from short-term stock movements (versus long-term investments), but which trading strategy is the better one? Here are the pros and cons of day trading versus swing trading, and the major differences between the two.

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. 

Day trading involves a very unique skill set that can be difficult to master. Investopedia's Become a Day Trader course provides an in-depth overview of day trading, complete with more than five hours of on-demand video. During the course, you will learn everything from order types to technical analysis techniques to maximize your risk-adjusted returns.

Day Trading

The biggest lure of day trading is the potential for spectacular profits. But this may only be a possibility for the rare individual who possesses all the traits, such as decisiveness, discipline, and diligence, required to become a successful day trader.

The U.S. Securities and Exchange Commission (SEC) points out that "days traders typically suffer financial losses in their first months of trading, and many never graduate to profit-making status." While the SEC cautions that day traders should only risk money they can afford to lose, the reality is that many day traders incur huge losses on borrowed monies, either through margined trades or capital borrowed from family or other sources. These losses may not only curtail their day trading career but also put them in substantial debt.

The day trader works alone, independent from the whims of corporate bigwigs. He can have a flexible working schedule, take time off whenever needed, and work at his own pace, unlike someone on the corporate treadmill.

Day traders have to compete with high-frequency traders, hedge funds, and other market professionals who spend millions to gain trading advantages. In this environment, a day trader has little choice but to spend heavily on a trading platform, charting software, state-of-the-art computers, and the like. Ongoing expenses include costs for obtaining live price quotes and commission expenses that can add up because of the volume of trades.

Long-time day traders love the thrill of pitting their wits against the market and other professionals day in and day out. The adrenaline rush from rapid-fire trading is something not many traders will admit to, but it is a big factor in their decision to make a living from trading. It's doubtful these kinds of people would be content spending their days selling widgets or poring over numbers in an office cubicle.

To really make a go at it, a trader must quit his day job and give up his steady monthly paycheck. From then on, the day trader must depend entirely on his own skill and efforts to generate enough profit to pay the bills and enjoy a decent lifestyle.

Day trading is stressful because of the need to watch multiple screens to spot trading opportunities, and then act quickly to exploit them. This has to be done day after day, and the requirement for such a high degree of focus and concentration can often lead to burnout.

For many jobs in finance, having the right degree from the right university is a prerequisite just for an interview. Day trading, in contrast, does not require an expensive education from an Ivy League school. While there are no formal educational requirements for becoming a day trader, courses in technical analysis and computerized trading may be very helpful.

Swing Trading

Swing trading is based on identifying swings in stocks, commodities, and currencies that take place over a period of days. A swing trade may take a few days to a few weeks to work out. Unlike a day trader, a swing trader is not likely to make trading a full-time career.

Anyone with knowledge and investment capital can try swing trading. Because of the longer timeframe (from days to weeks as opposed to minutes to hours), a swing trader does not need to be glued to his computer screen all day. He can even maintain a separate full-time job (as long as he is not checking trading screens all the time at work). 

Trades generally need time to work out. Keeping a trade for an asset open for a few days or weeks may result in higher profits than trading in and out of the same security multiple times a day.

Since swing trading usually involves positions held at least overnight, margin requirements are higher. Maximum leverage is usually two times one's capital. Compare this with day trading where margins are four times one's capital.

The swing trader can set stop losses. While there is a risk of a stop being executed at an unfavorable price, it beats the constant monitoring of all open positions that are a feature of day trading.

As with any style of trading, swing trading can also result in substantial losses. Because swing traders hold their positions for longer than day traders, they also run the risk of larger losses.

Since swing trading is seldom a full-time job, there is much less chance of burnout due to stress. Swing traders usually have a regular job or another source of income from which they can offset or mitigate trading losses.

Swing trading can be done with just one computer and conventional trading tools. It does not require the state-of-the-art technology of day trading.

Key Differences

Day trading and swing trading each have advantages and drawbacks. Neither strategy is better than the other, and traders should choose the approach that works best for their skills, preferences, and lifestyle. Day trading is better suited for individuals who are passionate about trading full time and possess the three Ds: decisiveness, discipline, and diligence (prerequisites for successful day trading).

Day trading success also requires an advanced understanding of technical trading and charting. Since day trading is intense and stressful, traders should be able to stay calm and control their emotions under fire. Finally, day trading involves risk—traders should be prepared to sometimes walk away with 100 percent losses. 

Swing trading, on the other hand, does not require such a formidable set of traits. Since swing trading can be undertaken by anyone with some investment capital and does not require full-time attention, it is a viable option for traders who want to keep their full-time jobs, but also dabble in the markets. Swing traders should also be able to apply a combination of fundamental and technical analysis, rather than technical analysis alone.

Key Takeaways

  • Day trading, as the name suggests, involves making dozens of trades in a single day, based on technical analysis and sophisticated charting systems.
  • Swing trading is based on identifying swings in stocks, commodities, and currencies that take place over a period of days.
  • Neither strategy is better than the other, and traders should choose the approach that works best for their skills, preferences, and lifestyle.