If you’re like many people, you may have dabbled in some kind of trading that promises quick returns. However, most people may not fully understand the differences between day trading and swing trading—two of the most popular forms of trading out there. Maybe you work for a company that has a program to reward its employees for years of loyalty. You’ll probably be doing Google searches along the lines of “stock options alerts: day and swing trading” to understand how you can take advantage of such opportunities.
What is Day Trading?
Most people may have come across terms like stocks, bonds, or other such financial instruments. Day trading is the activity of buying and selling such things to make a profit. This profit is generated as a result of price movements—the difference between the prices of a commodity or stock at different times during the day.
A typical day trading session may involve a trader purchasing a stock and then selling it minutes or even seconds later. The amount of time a trader holds onto a financial instrument will depend on a host of factors, including their objective and expertise. When a trader holds stock or some other financial instrument, they are said to “hold a position.”
A typical trader will hold multiple open positions, meaning they have bought different stocks or other financial instruments and such trades have yet to close. The volatility involved in day trading makes it both exciting and risky; a trader could lose significant sums of money if they make enough bad trades in a day. All-day trading actions occur during trading hours. By holding multiple open positions, a day trader can keep costs down. Traders love to hold open positions overnight because such positions are not subject to overnight funding fees.
What is Swing Trading?
Whereas a day trader is there for the possible quick profits that can be made in minutes or hours, a swing trader holds their position for much longer, usually days or weeks.
Holding onto their positions for longer periods doesn’t mean that swing traders do not make profits. Just like in day trading, swing trading heavily relies on market volatility and liquidity. Liquidity is particularly important because it is a measure of how quickly a trader can buy or offload a financial instrument without inducing a significant change in its price.
In swing trading, individuals tend to hold fewer positions. However, this fact does not negate the potential for massive returns. On average a swing trader spends less time following their traders, unlike a day trader. Some can choose to hold positions overnight to enjoy the benefits of not paying overnight funding fees.
Day Trading vs Swing Trading
The difference between day trading and swing trading can be summed up in the duration of trades and the number of positions opened.
A day trader can hold multiple positions during the day, usually for a few minutes or hours. They tend to close their positions at the end of the trading day. A typical day trading strategy is to open many positions, usually with the risks of more losses or, if they are successful, gains.
A swing trader holds positions for days, hours, or even weeks. Their traders are much fewer than day traders. They tend to open fewer positions, with greater losses or gains.
Which One is Better?
There’s always that debate about which type of trading is better. A big factor is an individual trader’s preferences; some may be looking for profitability with little regard for risk or effort needed. Other traders may value relative safety, meaning they would rather go for trades with less risk to lose less money.
Day trading enthusiasts will argue that because they place multiple small traders and hold onto their positions for short timespans, the potential for profits is amplified. However, the risk of losses is equally amplified. A key aspect of day trading that isn’t talked about enough is the expertise required. A day trader has to be on top of their game to realize profits. This is made much harder because of the time required to make astute decisions, usually in seconds or minutes. One wrong move and a day trader can lose a good amount of money.
While swing trading involves holding fewer positions, it can still lead to losses if the trader’s market prediction is wrong.
Ultimately, it depends on a trader’s expertise and level of risk tolerance. Time commitment should also be a crucial factor.