Day Trading vs. Swing Trading
What Investors Need to Know
When it comes to trading financial securities, the timing of the trades can significantly impact strategy and profitability. Day traders open and close multiple positions within a single day. In contrast, swing traders take trades that last multiple days, weeks, or even months. These two different trading styles can suit various traders depending on the amount of capital available, time availability, psychology, and the market being traded.
We'll discuss how day trading and swing trading work as well as the capital and time required for each strategy. In the latter part of the post, we'll share how to decide between the two.
- Day traders typically buy and sell securities within the same day, often multiple times per day.
- Swing trading is still a fast-paced form of trading but involves making trades over a few days, weeks, or months.
- Capital requirements vary for day traders and swing traders depending on whether they trade the stock, forex, or futures markets.
- Day trading may be a good choice for those who want higher profit potential, while swing trading may suit those who want a lower-stress option.
How Day Trading Works
Day trading attracts traders looking for rapid compounding of returns. The name "day trading" comes from the fact that traders typically buy and sell securities within the same day, often multiple times per day.
In the day trading community, it's common to follow a rule called the 1% risk rule. The rule states that a trader should never risk more than 1% of their portfolio on any single trade. Let's walk through an example.
Assume a trader risks 0.5% of their capital on each trade. If they lose, they'll lose 0.5%, but if they win, they'll make 1% (2:1 reward-to-risk ratio). Also, assume they win half of their trades. If the trader makes six trades per day—on average—they will be adding about 1.5% to their account balance each day, less trading fees. Even making 1% a day would grow the trader's account by more than 200% over the year, uncompounded.
On the flip side, while the numbers seem easy to replicate for huge returns, nothing's ever that easy. Making twice as much on winners as you lost on losers, while also winning 50% of all the trades you take, doesn't come easily. You can make quick gains, but you can also rapidly deplete your trading account through day trading.
As a general rule, day trading has more profit potential than swing trading, at least on smaller accounts.
How Swing Trading Works
Day trading involves making one or more trades per day. Swing trading is still a fast-paced form of trading but involves making trades over a few days, weeks, or months. As a result, swing trading accumulates gains and losses more slowly than day trading. However, you can still have certain swing trades that quickly result in big gains or losses.
Assume a swing trader uses the same risk management rule and risks 50% of their capital on each trade to try to make 1% to 2% on their winning trades. Also assume they earn 1.5% on average for winning trades, losing 0.5% on losing trades. They make six trades per month and win half of those trades. In a typical month, the swing trader could make 3% on their account balance, reflecting the fewer fees. Over the year, that comes out to about 36%, which sounds good but offers less potential than a day trader's possible earnings.
These example scenarios serve to illustrate the distinction between the two trading styles.
Altering the percentage of trades won, the average win compared to the average loss, or the number of trades, will drastically affect a strategy's earning potential.
Capital requirements vary according to the market being traded. Day traders and swing traders can start with differing amounts of capital, depending on whether they trade the stock, forex, or futures markets.
Day trading stocks in the U.S. requires an account balance of at least $25,000. No legal minimum exists to swing trade stocks. However, a swing trader will likely want to have at least $10,000 in their account, and preferably $20,000 if they are looking to draw an income from trading.
No legal minimum exists to day trade the forex market. It is recommended that traders start with at least $500, but preferably $1,000 or more. To swing trade forex, the minimum recommended amount is about $1,500, but preferably more. This amount of capital will allow you to enter at least a few trades at one time.
For day trading futures, start with at least $5,000 to $7,500. These amounts depend on the futures contract being traded. Day trading some contracts could require much more capital, while a few contracts, such as micro contracts, may require less.
To swing trade a variety of futures contracts, you need at least $10,000, and likely $20,000 or more. The amount needed depends on the margin requirements of the specific contract being traded.
Time Spent Trading
Both day trading and swing trading require time, but day trading typically takes up much more time.
Day traders usually 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. If a day trader opts to trade for more than a couple of hours a day, the time investment goes up considerably and becomes a full-time job.
Swing trading can take much less time. For example, if you're swing trading off a daily chart, you could find new trades and update orders on current positions in about 45 minutes a night. These activities may not even be required on a nightly basis.
Swing traders who take trades that last weeks or months 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.
Deciding Between Swing Trading and Day Trading
Swing trading and day trading both require a good deal of work and knowledge to generate profits consistently. However, the knowledge required isn't necessarily "book smarts." Successful trading results from finding a strategy that produces an edge, or a profit over a significant number of trades, and then executing that strategy over and over again.
Consistent results only come from practicing a strategy under numerous different market scenarios. That takes time and should involve making hundreds of trades in a demo account before risking real capital.
Choosing day trading or swing trading also comes down to the trader's personality and preference.
Here's what to consider when deciding:
- Stress: Day trading typically involves more stress than swing trading.
- Pace: The pace of day trading can be rapid. With swing trading, trades can carry on over days and weeks.
- Focus: Because of the pace and short windows of opportunity, day trading requires sustained focus for extended periods. Swing trading still requires focus, but there are much longer lapses between actions like entering or exiting trades.
- Freedom: One can argue that swing traders have more freedom because swing trading takes up less time than day trading.
The Bottom Line
One trading style isn't better than the other; they just suit differing needs. Day trading has more profit potential given the higher frequency of trading. With that said, swing traders still have plenty of potential for profit.
Capital requirements can vary across the different markets and trading styles. Day trading requires more time than swing trading, while both take a great deal of practice to gain consistency. Day trading makes the best option for action lovers. Those seeking a lower-stress and less time-intensive option can embrace swing trading.
Frequently Asked Questions
Here are answers to three commonly asked questions about swing trading.
What Is Swing Trading?
Swing trading is a strategy that involves making trades over the course of a few days, a few weeks, or even months. The goal is to capture short-term to medium-term profits as trends change in a market.
How Do You Pick Stocks for Swing Trading?
Picking stocks for swing trading will involve a mixture of fundamental and technical analysis. Fundamentally, you want stocks to exhibit certain traits based on the position you are taking. If you are taking a long position, you will want to see a reasonably priced valuation, strong earnings, and a healthy balance sheet. As for technical analysis, you can identify opportunities by using support and resistance levels and indicators that show volume and momentum.
How Do You Start Swing Trading?
To start swing trading, you will need to open up and fund an account with a brokerage. Once you are funded, you can begin placing trades on their platform. Before you begin, take advantage of paper trading, which is the process of making hypothetical trades as if you were trading real funds. Many brokers offer a paper trading demo account for free to allow you to learn the platform and practice your strategies.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.