Day Trading vs Swing Trading

Since I began trading, I’ve always heard a lot of back forth between day traders and swing traders. You of course know that one side will argue that one is better than the other, but as you also know, it’s based on a few things which has mostly to do with the trader’s personal situation — capital, risk tolerance, patience, etc. With that being said, I’m gonna analyze both and always I will let you decide which is better for you.

Just so you know the difference between the two, let’s clarify them.

Day trading is when a trader looks to trade the markets on an intraday timeframe. Most day traders will not hold a position overnight. It’s not unusual for a day trader to make several trades in a single day.

Swing trading is when a trader enters the market on what they perceive to be a turning point in the market. For instance — there was a major down trend and it appears that the trend is reversing to the upside. The swing trader will seek to profit from a potential long position. Swing traders usually hold positions for a few days or even a week.

Let’s now discuss the pros and cons of both.

Day Trading:

Pros – If done right, day trading can be very lucrative on a day to day basis. If you’ve ever heard a trader boast about making hundreds or even thousands of dollars a day, that person is most likely a day trader (granted that he isn’t lying and trying to sell you something). Day traders rely on technical analysis (mostly price action) to make their trade decisions. Despite what many people say, there are usually a few good trade setups that occur on the intraday charts. If acted upon correctly, those setups can be very profitable. With a good risk management system and depending on the amount of capital one has available, a lot of money can be made very quickly, especially in the and forex futures markets. As for capital requirements — that depends on the position size you’re looking to trade and the amount of risk you’re willing to take.

Cons – It’s been stated repeatedly that day trading is a loser’s game. Estimates show that 95% of day traders lose money. Some have put it at 90% but all in all, the loser rate is astronomical. One reason why day trading can be tricky is because economic indicators are released almost every day. If a day trader doesn’t keep up with those economic indicators, things can turn ugly really fast when they’re released. For instance — if a trader has an intraday long position on the USD/JPY Forex pair and the U.S. Non-Farm Payroll report announces a less than stellar job market, the pair begins to drop significantly and the trader can’t exit his position fast enough. However, some day traders will seek to trade the markets during the release of an economic indicator solely for the purpose of hoping to position themselves on the right side of the move that will ensue. A lot of guys get burned doing this and for some, it’s very rewarding.

Some will say that the intraday market gives a lot of false signals and that intraday trading is nothing but trading noise. There’s a lot of truth to that which is why again, risk management comes into play. Most day traders are aware of this which is why they won’t hold positions for too long. Another con with day trading is that a trader has to make decisions really quickly. Let’s be honest —  most people don’t do well in situations in which they have to make quick decisions. If a trader vacillates in his decision making, he could have missed a good portion of the move they were attempting to capture.

Now let’s talk about….

Swing Trading:

Pros – Truth be told, swing trading is how the major players make their money. You hear them talk about long-term trend following, but let’s be serious. The market trends only 15% of the time, so these guys are swinging most of the time. We’re talking about guys who make millions of dollars per years. Identifying and swing trading trends is how some of the biggest names on Wall Street have gotten to be where they are. When I discuss swing trading, there’ always one trade which I think of first. It is the Corn futures trade which occurred over the summer of 2012. Speaking in terms of price action, corn had been in a tight bear channel since mid March. The market then provided a strong buy signal in early June. Starting on June 4, 2012, corn opened at 560.25. That was the start of a bull trend that lasted for two months with corn reaching a high of 849. If you would have bought at the opening price and sold at the close that I quoted for both, your profit would have been $14,437.50 per contract. By the way, I know a guy who bought 50 contracts for that bull run in corn…

Like day traders, swing traders also rely on technical analysis to make their trading decisions. Another thing is that swing traders don’t have to worry too much about economic indicators unless that indicator causes a move so strong that their stop is hit. But since a swing trader is holding for a longer period of time, economic indicators are nothing more than daily noise most of the time and don’t really effect the overall trend.

Cons – One of the major cons with swing trading is that you have to be well capitalized in order to swing trade for two reasons. 1) It’s possible for you to be wrong on a lot of your trades. In my own case, however, I’ve been able to develop a system with a high-win rate. 2) When you’re swinging trading, the market moves are much bigger and can wipe out a large part of a trader’s account if they’re under capitalized, or even the entire account and then some (if it’s a margin account). Let me illustrate what I mean. Say for instance you’re trading Cocoa Futures. Through my broker, the current margin requirement to buy a Cocoa contract is $935. When cocoa moves, every tick is +/- $10. If cocoa moves 100 points against you over a 2-day period, your total loss is $1,000 plus commission, which means that you owe your broker $65. That’s a pretty extreme example but it’s very possible. By the way, if you allowed that to happen, your risk management sucks.

Also, if a trader doesn’t have the patience to hold a position for days as the market ticks up and down, swing trading may not be for them. In my opinion, you’re taking a much bigger risk when swing trading when you’re under capitalized but again it comes down to money management.

Conclusion: Either trading style can be very lucrative or very ruinous depending on the trader and his/her tactics. I will repeat it yet again — it comes down to risk management. With good risk management, you could be wrong a lot and still be profitable overall. Your level of patience also has a lot to do with it as well. If you can tolerate risk for a short period time, day trading is for you. If your tolerance for risk is high, swing trading is for you. But in either case, it wouldn’t be a good bad to closely monitor your positions the entire time, that’s what risk management is for. I used to have a bad habit of doing just that which caused me to exit what turned out to be good trades, but since I was watching every tick of the market, I would exit when it moved against me (without hitting my stop, I might add). That is why it’s so important to have other hobbies and interests besides trading.

The point of this article wasn’t to get you to dedicate to one or the other. Not at all. As far as I’m concerned, if there’s an opportunity to make a good trade on either a day trade or a swing trade, I’ll seize the opportunity.


3 thoughts on “Day Trading vs Swing Trading

  1. Interested in meeting and discussing a starting a mini hedge fund bringing both of our trading knowledge to the next level. I’ve been in the markets trading live for over 3 years in Futures/Commodities and Forex and i’m seeking trading partners Atlanta area to source and manage capital (SEC Accredited).

    Damon Swinton
    Forex & Futures Traders


  2. Pingback: Equities vs. Derivatives vs. Forex

  3. Pingback: How To Get Started In Trading? | Sean T. Carter

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