When we talk of trading in stock markets, you would have heard terms like intraday trading, swing trading, scalping, and more. These are nothing but different trading styles that cater to a variety of traders based on their individual trading patterns. Swing trading and day trading or intraday trading are among the common forms of trading with a majority of traders belonging to either category. But what are the basic differences between swing trading vs day trading- which is a better one among the two? Check out this blog to get answers to these questions.
Read More: Top 7 Strategies for Intraday Trading
What is day trading?
Day trading, also known as intraday trading, is a popular trading practice of buying and selling securities (stocks, currency, commodities, etc.) within the same day. In this style of trading, traders aim to profit from short-term price movements and take advantage of intraday fluctuations in the market. The key feature of day trading as the name suggests, is the settlement of traders by the end of the trading session. Day trading involves high risk due to the volatile nature of short-term price movements and requires quick decision-making, technical analysis skills, and a good understanding of market trends. Traders, therefore, use various tools and strategies, such as chart patterns, technical indicators, and real-time data, to identify potential entry and exit points to successfully execute intraday trades.
What is swing trading?
Swing trading is a trading strategy that aims to capture short- to medium-term price movements in financial markets. Unlike day trading, swing trading involves holding positions for a few days to several weeks, taking advantage of price swings or trends during that time frame. Swing trading is a versatile trading strategy and can be used in case of stock trading, commodity trading, or currency trading.
The goal of swing trading is to profit from the price fluctuations that occur within the larger trend of an asset. Traders identify potential entry and exit points based on technical analysis tools to anticipate price and volume movements for the security. Swing trading provides more flexibility, as traders don’t need to constantly monitor the markets throughout the day.
What are the key differences between swing trading and day trading?
Some of the key differences between swing trading and day trading are highlighted hereunder.
|Swing traders usually have a short-term to medium-term trading horizon and hold securities for days to weeks.
|Day traders have a very short trading horizon and hold securities typically for a few minutes to a maximum before squaring them off at the end of the trading session.
|Frequency of trades
|Swing traders usually have fewer traders over the period of days or weeks as compared to day traders.
|Day traders focus on a high frequency of traders to make substantial profits at the end of the day.
|Swing traders usually require more capital to trade which may be a deterrent for many traders to enter into swing trading.
|Day trading requires lower capital as compared as the positions are squared off at the end of the trading session making it more accessible to a large number of traders.
|Risk and return
|The risk in swing trading is usually higher as traders hold positions for longer durations as compared to day trading but the returns are also potentially higher in comparison to the latter.
|The risk in day trading is potentially lower as compared to swing trading as positions are held for a shorter duration as well as has potentially lower profits.
|Swing trading involves a more patient and relaxed approach to trading,
|Day traders requires quick decision-making and strong emotional control,.
|Impact of news and events
|Swing traders consider the potential impact of news and events on the market, especially those occurring during their holding period, but have the flexibility to wait out short-term volatility.
|Day traders are highly sensitive to real-time news and events, as any significant announcement during the trading day can cause sudden price fluctuations, significantly impacting their intraday positions.
|Monitoring during Market Hours
|Swing traders require less constant monitoring throughout the day and therefore reduced market hours for trading.
|Day traders require constant monitoring of the markets and are effectively full-time traders.
|Swing traders have higher margin requirements due to longer holding periods.
|Day traders typically enjoy lower margin requirements since their positions are opened and closed within the same day. This allows them to utilize their smaller capital in an effective manner.
|Swing traders utilize a combination of technical and fundamental analysis, considering short-term and long-term trends and market fundamentals for making trading decisions.
|Day traders require a focused, detail-oriented approach and therefore, rely heavily on technical analysis, short-term chart patterns, and real-time data to identify intraday opportunities.
Swing trading or day trading- which is better?
While this question would be haunting many traders, sadly, there is no definite answer to the same. Traders should focus on individual preferences like risk tolerance, trading horizons, available time to trade, and trading styles. Swing trading can be suitable for traders seeking a lower or less time-consuming trading approach while day trading can be suitable for traders preferring fast-paced yet lower risk-return trading format. Moreover, capital availability also plays a huge contributor in the decision between swing trading and day trading. Therefore, there cannot be a one size fits all answer to the above question, however, both swing trading and day trading requires a thorough understanding of the market and the securities to be traded for executing successful trades.
Swing trading and day trading are popular trading formats and many traders often execute both formats of trading. The key difference between swing trading and day trading lies in the time frame for trading and the frequency of trades to achieve the target profits. However, it is prudent for traders to use stop loss or trailing stop loss as the case may be to limit their losses as they are both considered to be high-stakes games.
The profit target for swing traders is usually higher than day trading as it aims for larger price movements and profits. Day trading, on the other hand, targets smaller price movements but more frequent opportunities.
The exit strategies in swing trading are often based on set profit targets or stop-loss levels while that of day trading is usually based on intraday price targets.
Swing trading and day trading along with other forms of trading is regulated by SEBI and the principles of the stock exchanges.
The biggest disadvantage of swing trading is the exposure to overnight and multi-day market risks, as well as higher capital requirements due to the positions being held for more extended periods. Unexpected news events or market gaps during these holding periods can lead to significant losses for swing traders.