Many beginners and even professionals face the dilemma of having to choose between day trading and swing trading. Such a choice often becomes intricate because there exist differences in terms of the time it requires, danger exposure, and probable profitability attached to either of them.
I tested for both 30 days straight to really understand what each style would be. I spent half of this time doing day trading and the other half swing trading, comparing their unique characteristics and trying to decide which might be more suitable for a given type of trader.
This article communicates my thoughts in this experiment, breaking down the pros and cons of each approach, the challenges I faced, and takeaways which may help inform others to reach a decision for which will best fit the goals and lifestyle.
What is Day Trading?
It involves the purchase and sale of securities within the same trading day with the motive of capturing small price movements. The day trader closes all the positions at the end of each trading day to avoid overnight risks, which are inherent in holding positions. It demands real-time analysis, quick decision-making, and a very high level of focus throughout the trading session.
Advantages of Day Trading
- No Overnight Risk: This is probably the biggest advantage of day trading: eliminating overnight risk. When the markets close, unexpected events or news can greatly affect a stock’s value when the market reopens, which can be a problem for swing traders.
- Potential for Daily Returns: A day trader has the potential to make profits every trading day, potentially compounding returns faster than with swing trading.
- Sleep with Peace of Mind: As positions are closed daily, day traders can sleep well without worrying about market fluctuation during non-trading hours.
Disadvantages of Day Trading:
- High Stress: The frenetic pace of day trading can be stressful, especially to those who have to watch every tick and execute trades in a flash.
- Necessity for High Tech: High-tech platforms, real-time information, and quick internet are something through which trade execution happens within the shortest time. Overheads might be borne.
- Substantial Amount of Initial Capital: As per pattern day trading rules in the United States, a trader must keep at least an amount of $25,000 in his/her account if he/she makes three or more trades within any five-day period.
Definition of Swing Trading
Swing traders hold their position for sometimes days and sometimes weeks to take advantage of the wider overall trend in the market. This leads to trying to gain major portions of the expected price range as opposed to getting advantages of intraday minute-range moves.
Advantages of Swing Trading:
- Lower Time Commitment: Unlike day traders, swing trading does not involve full-time monitoring, and so it is perfect for individuals who cannot spend the whole day trading.
- Easier Technology Requirement: Swing traders can even operate from a mobile or a simpler platform since they are less dependent on the speed of execution of trade.
- Opportunity for Higher Returns: Swing trading is a means of capturing higher price moves that commonly resolve into potentially better returns in one trade.
Drawbacks of Swing Trading
- Overnight Risk: Swing trading also exposes the traders to overnight risks from market movements. Sometimes, unexpected news or geopolitical events could have a negative impact on an opened position.
- Tense Nights: Overnight carrying can lead to high stress levels, especially if the markets are extremely volatile. Such carries cannot be monitored constantly, so it becomes harder to respond when changes occur outside of trading hours.
- Low Compounding Rates: Day trading allows gains to be earned day after day and re-invested. In swing trading, profits take much longer to achieve. This affects the compounding rate.
Focus is the Name of the Game
One of the things I felt that was crucial during the day trading stint was having an uninterrupted focus. Trades were completed one after the other, thereby requiring complete attention.
It’s a Tough Game on the Emotions
Day trading can be tough on the emotions since quick wins and losses happen frequently. Without disciplined action, one easily falls into a series of impulsive decisions.
Daily Routine
Day trading required a daily routine. I would allocate specific hours every day, usually during the most liquid time of the day, and controlled my over-trading with specific limits for the day.
Frequent Transaction Fees
Since trades occurred so frequently, the overall impact of transaction fees and commissions built up very quickly. You have to have a strategy that counters these expenses.
Key Things Learned about Swing Trading
- Overnight Hedging with Options: One of the earliest lessons I learned while swing trading was that my one trade plummeted by 50% overnight without warning. It really gave me a lesson on how much of a great hedge using options can be for large overnight moves, especially for riskier trades.
- Flexible Time Management: The schedule was more flexible in swing trading, meaning I could spend fewer hours monitoring the markets but dedicating more time to analysis. Flexibility is a big plus for those who have other commitments.
- Focus on Broader Trends: In swing trading, you have no option but to be averse to responding to every little movement and look at broader trends and price patterns over longer periods. It taught me to be much more patient and think strategically.
- Lower Costs: Since there were fewer trades than compared to day trading, swing trading, therefore, meant cheaper transaction fees, lower costs, and therefore was able to control costs.
Which One is Better for You?
Whether to day trade or swing trade depends highly on your lifestyle, risk tolerance, and personal preferences.
- If you have a high degree of attentiveness to details and are capable of tolerating stress: Day trading may work better for you. You will have to devote consistent time on a daily basis to monitor the markets coupled with the emotional ups and downs that come with rapid trades.
- If You Like a More Flexible Schedule with Moderate Risk: Swing trading is better suited, especially if you can hold overnight positions and don’t mind using options to hedge some of that risk.
The pattern day trading rule means the account may be larger to accommodate day trading, while for swing trading, an account is easy to start with whatever size is readily available. It is suitable for lesser budgets, especially when trading in equities, as opposed to futures or Forex.
Conclusion After 30 days
This 30-day experiment trading days and swing trading opened my eyes to both different advantages and disadvantages inherent in each approach. For flexible goals, I now prefer a mix of the two, depending on the needs at the time. While consistent income potential with high focus and commitment is possible through day trading, flexibility to be able to take advantage of broader market trends in swing trading end.
Ultimately, neither approach is inherently better than the other, but it will come down to actually being your personality, lifestyle, and objective as a trader. Be it day trading, swing trading, or some combination of the two, the mystery here lies in a good plan with disciplined risk management and continuously working to adjust in changing markets.
