Pros and Cons of Day Trading Versus Swing Trading

Which one of these popular trading styles is right for you?

day trading versus swing trading
Raphye Alexius/Getty Images

The time frame on which a trader opts to trade is an important decision. Day traders open and close multiple positions within a single day, while swing traders take trades that last multiple days, weeks or even months. They are different trading styles and will suit different people depending on capital available, time availability, psychology (do you like lots of action or prefer to relax?) and also which market is being traded.

Between day trading and swing trading, one style isn't better than another. It's just preference, and which style suits the trader's personal circumstance. Some traders opt to do one or the other, while others may be day traders, swing traders, and investors all at once.

Day Trading Versus Swing Trading: Potential Returns

One of the main benefits of day trading is the rapid compounding of returns. Assume a traders risks 0.5 percent of their capital on each trade. If they lose, they lose 0.5 percent, but if they win they make 1 percent (2:1 reward-to-risk ratio). Also, assume they win 50 percent of their trades. If they make six trades per day, on average, they will be adding about 1.5 percent to their account balance each day, less trading fees. Making even 1 percent a day would grow a trading account by more than 200 percent over the course of the year, uncompounded.

The flip side is that while the numbers look easy to replicate to for huge returns...

it isn't that easy. Making twice as much on winners as is lost on losers, while also winning 50 percent of the trades taken, isn't an easy feat. While it is possible to make quick gains, it is also possible to rapidly deplete a trading account through day trading.

Swing trading will accumulate gains and losses slower than day trading, typically (it is still possible to have certain swing trades that result in big gains or losses quickly).

Assume a swing trader uses the same risk management rule and risks 0.5 percent of their capital on each trade. Likely they too will be trying to make 1 percent to 2 percent on their winning trades. Assume they average 1.5 percent on winning trades, and 0.5 percent on losing trades. They make six trades month and win 50 percent of those trades. In a typical month, the swing trader may make 3 percent on their account balance, less fees. Over the course of the year, that is pretty good... about 36 percent. But it is less than what a day trader could potentially make.

These are just scenarios to draw a distinction between the two trading styles. Altering the win-rate (percentage of trades won), the reward/risk (average win compared to average loss) or the number of trades will drastically affect the profit potential of a strategy.

As a general rule, day trading has more profit potential, as least on smaller accounts. As the size of the account grows it becomes harder and harder to effectively utilize all the capital on very short-term day trades. Therefore, day traders may find their percentage returns decline the more capital they have (dollar returns may still go up, because making 5 percent on $1million is a lot more than 20 percent on $100,000.

For swing traders, this isn't as likely to happen.

Summary: Day trading has the potential to produce higher returns than swing trading, but only on smaller amounts of capital. Swing trading is likely to produce lower returns than day trading, but the percentage returns are likely to stay steadier even as the account balance gets larger.

Day Trading Versus Swing Trading: Capital Requirements

Capital requirements vary by the market being trading. Day trading and swing traders can start with varying amounts of capital depending on whether they trade the stock, forex or futures market.

To day trade stocks in the US requires an account balance of at least $25,000. There is no legal minimum to swing trade stocks, although a swing trader will likely want to have at least $10,000 in their account, and preferably $20,000 if looking to draw an income from trading.

To day trade the forex market, there is no legal minimum, but it is recommended traders start with at least $500, but preferably $1000 or more. To swing trade forex, the minimum recommended is about $1,500, but preferably more. This amount of capital will allow for at least a few trades to be taken at one time.

To day trade futures, start with at least $5,000 to $7,500, and having more capital wouldn't hurt. These amounts depend on the futures contract being traded. Day trading some contracts may require much more capital, while a few contracts (micro contracts, for example) may require less. To swing trade a variety of futures contracts, at least $10,000 is needed, and likely $20,000 or more. Again, the amount needed will depend on the margin requirements of the specific contract being traded.

Summary: For day trading stocks, you need at least $25,000 and will probably want about the same for swing trading (but not required). For forex, you need at least $500 to day trade, and triple that to swing trade. For day trading futures start with at least $5,000, and for swing trading double or triple that number.

Day Trading Versus Swing Trading: Time Requirements

Both day trading and swing trading will take up time, but day trading will likely take up much more.

Day traders typically trade for at least two hours per day. Adding on preparation time and chart/trading review means spending at least three to four hours at the computer, minimum. If a day trader opts to trade for more than a couple hours a day, the time investment goes up considerably; it becomes a full-time job.

Swing trading, on the other hand, is not as time-consuming. For example, if swing trading off a daily chart then finding new trades and updating orders on current positions can be done in about 45 minutes a night. Finding new trades and/or updating orders may not even be required on a nightly basis. For some swing traders — taking trades that last weeks or months — they may only need to look for trades and update orders once a week, bringing the time commitment down to about an hour per week (instead of per night), or updating orders may not even be required on a nightly basis. For some swing traders —taking trades that last weeks or months — they may only need to look for trades and update orders once a week, bringing the time commitment down to about an hour per week (instead of per night).​

Day trading must also be done while a market is open and active. The most effective hours for day trading are limited to certain periods of ​the day. If a person can't day trade during those hours, then swing trading is a better choice. Swing traders can look for trades or place orders at any time of day, even when the market is closed. This is because swing traders are less affected by the second-to-second changes in the price of an asset. Swing traders are focused on the bigger picture, typically looking at daily charts, so placing trades after the market closes on a particular day (daily bar closes) works just fine. Day traders make money off second-by-second movements, therefore, they need to be involved when the action is happening.

Summary: Day trading takes up a lot more time than swing trading. Also, day trading is best done at very specific times of day, whereas swing trades can be found or orders placed/altered at any time.

Swing Trading Versus Day Trading — Education, Psychology, and Freedom

Swing trading and day trading both require a lot of work and knowledge in order to generate profits consistently, although the knowledge required isn't necessarily "book smarts." Successful trading is finding a strategy that produces an edge (a profit over a significant number trades), and then executing that strategy over and over again.

A bit of knowledge about the market being traded, and one profitable strategy, is all it takes to start generating income...​ and lots and lots of practice. Each day prices will move differently than they did on the last, which means the trader needs to be able to implement that strategy under various conditions, and adapt as conditions change. This is difficult, and consistent results will only come from practicing a strategy under loads of various market scenarios. That takes time and should involve taking hundreds of trades in a demo account before risking real capital.

Whether to choose day trading or swing trading also comes down to personality. Day trading can be higher stress, requires sustained focus for extended periods of time and incredible discipline. People that like action, have fast reflexes, and/or like video games and poker tend to gravitate toward day trading.

Swing trading is a slower, as there are much longer lapses between actions (entering or exiting trades). It can still be high stress, and also requires immense discipline and patience. Sustained focus isn't as much a requirement, so if staying focused is a problem, swing trading may be the better option. Fast reflexes are not required in swing trading (trades can be taken market is closed and prices are not moving).

Day trading and swing trading both offer freedom in the sense that a trader is their own boss. Traders typically work on their own and are ultimately responsible for funding their accounts and for all losses and profits generated. It is arguable that swing traders have more freedom in terms of time, because swing trading takes up less time than day trading.

Summary: Swing trading and day trading both require a lot of practice. Both require being able to implement at least one profitable strategy consistently, in ever-changing market conditions. Day trading is higher stress and requires sustained focus; swing trading is lower key. Both trading styles off freedom from a boss, but swing trading provides more free time.

Final Word on Day Trading Versus Swing Trading

One trading style isn't better than another. They are just different. Day trading has more profit potential, at least in percentage terms on smaller sized trading accounts. Swing traders are more likely to be able to maintain their percentage returns even as their account grows (up to a certain point). Capital requirements vary drastically across the various markets and trading styles. Day trading requires more time than swing trading, but both will take a lot of practice to gain consistency. Day trading is best left to the "action lovers." Those seeking a lower-stress and less time-intensive option should stick to swing trading.