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Day Trading vs Swing Trading – A Simple Explanation

Day Trading

Day trading is a relatively unsophisticated trading method that is low risk in comparison to other strategies. This trading method does have some key benefits, but as with everything, there are a few drawbacks which may put off some investors. Swing trading is different from day trading in a few key ways. The main difference between swing trading and day trading is that positions are held for longer (usually for a few days) in swing trading, whereas positions are only held for a few hours in day trading.

Day Trading

What is Day Trading?

As already mentioned, day trading is a fairly simple trading method, where all positions are opened and closed within a single day, hence the name “day trading”. Therefore, no positions are held overnight, so the investor’s risk exposure is reduced. This method is suitable for part-time traders, as they only need to react to the market when they have a position open. It should be noted that many day traders do in fact trade full time, as they need to make several successful trades in a day in order to turn a significant profit. It is because of the above benefits that this trading method is so commonly used. However, day traders often have to work for many hours to make a significant amount of money, as they only make a small return on their investment per trade.

Day Trading Can be Stressful

Trading can cause a lot of stress for a trader, however, day trading is a lot less stressful than other trading methods, as positions are not held overnight and you know exactly how much you have made or less at the end of the day. However, it can be very stressful while you are trading, as decisions have to be made very quickly.

There is a lot of potential to make money from day trading, but the amount that you can make is limited, as the value of a stock is unlikely to move as much in a day, as it would in a week, month or year. Therefore, the rewards from day trading may not be considered lucrative enough for some, especially when you take into account the inevitable amount of risk involved (even though the risk is quite low in day trading.) Swing trading is often more lucrative and yields higher financial returns than day trading. This is because positions are held longer. However, loses may also be greater in swing trading than day trading, for obvious reasons.

Day trading can also be very intense, as with all trading strategies. As most day traders are not very experienced, they may not be able to handle the associated pressure and stress. This may lead them to make bad trades and lose money. You could argue that swing trading is equally stressful, but some traders perform better when they have more time to make trades and react to the markets. Other traders may find it impossible to sleep when they have a position open/held overnight, as they are constantly worrying about it.

Swing Trading is Less Time Intensive

Swing traders often only trade part time. As a result, they are able to maintain a job and a steady source of income. Therefore, they are not reliant on their earnings from trading. This often allows a trader to be more relaxed as they have alternatives if trading does not work out for them.

Day traders usually require expensive equipment, such as multiple computer screens and specialist software. This is because they need to analyse different aspects of the market or a particular stock in real time. Therefore, many new traders may not have the budget to purchase all this equipment or they may not have the required skills to use the software. Swing traders usually just have one screen and only use basic software that is free in most cases.

Practice Trading in a Demo Account

Both of these trading techniques allow you to be your own boss, and trade stocks for yourself, taking 100% of the profits. Another great advantage is that you don’t require a degree or any specialist skills to trade (this applies to both trading techniques.) There is plenty of information on the internet which allows you to learn about trading for free. It is highly recommended that you open a demo trading account first (regardless of which trading method you use.) Demo accounts are very similar to the real thing e.g. 1 share of Amazon on a demo account costs the same as it would on a real account etc. Therefore, a demo account can be used as an excellent learning tool and a way for you to try out new strategies and familiarize yourself with that trading software. It is also wise to try and trade as you would with real money, when using your demo account. For example, think carefully about each position you take up and imagine that the money is real. The psychology of trading is one of the only areas where demo trading and real trading differ.

It is also advisable to trade a similar amount on your demo account, as you would with your real account. For example, if you only have around $10,000 to trade (via your real account), then don’t trade hundreds of thousands of dollars on your demo account. If you follow these rules, then you can gain a lot of experience and knowledge from trading on a demo account, which you can then apply when trading with real money.

Summary

To summarize, day trading can be a very good method to make some profit, but there are other trading methods, such as swing trading, where you can generate greater financial returns, if you are willing to accept the increased risk and potential loses. These two different types of trading methods are suited to different people, with different requirements and budgets. You can make and lose quite a lot of money in any form of trading. There are a whole range of other trading techniques which you can employ, but day trading and swing trading are two of the most popular. It is also important that you have realistic expectations of how much money you want to make and you should never take unnecessary risks. All trading decisions should be well thought out and rational.

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