There are two primary types of active traders: swing traders and day traders. These types of trading both focus on making a profit from short-term trading efforts but also have several differences. Here we take a look at the definition of day trading and swing trading, how these two types of trading strategies work, and the pros and cons of each.
What Is Day Trading?
Day trading is a trading strategy that involves making several trades in a single day. Day traders make trades based on charting systems and technical analysis of the stock market. The primary goal of a day trader is to earn a living by trading currencies, stocks, and other financial instruments that each reap a small profit. Most day traders do not hold on to securities or positions overnight.
What Is Swing Trading?
Swing trading is a trading strategy based on finding swings in commodities, stocks, and other financial instruments that occur over several days. Most swing days take several days or even weeks to work out, so many swing traders do not participate in this type of trading full time as with day trading.
How Does Day Trading Work?
Day traders spend much of their time analyzing the marketplace they work within to purchase and sell securities within a single day. Most day traders work in the stock market or foreign exchange market. Day traders must stay up to date on various events that affect the market in the short term. They keep up with economic statistics, interest rates, market psychology, and corporate earnings.
Day traders use several strategies to make trades and avoid risks, including:
- Range trading.
- High-frequency trading.
- News-based trading.
Day trading is not investing; rather, it’s the art of buying and selling stock and other securities in a single day to make a small profit. Many day traders borrow many to act on small price movements in highly volatile indexes or stocks.
How Does Swing Trading Work?
Swing trading is when someone makes trades that last several days or months in order to profit from a speculated price move. The goal of swing trading is to capitalize on the short- and medium-term stock gains, as opposed to the much shorter gains focused on in day trading. Swing traders rely heavily on technical analysis to find trading opportunities but may also use fundamental analysis as well.
Pros and Cons of Swing Trading and Day Trading
The following are the pros and cons of day and swing trading:
- Con: Day traders often may more in commissions than in swing trading.
- Pro: Day trading allows traders the opportunity to get out of a position.
- Con: Swing traders are exposed to overnight and weekend risks.
- Pro: Swing trading doesn’t require all-day trading like in day trading.
- Con: Day trading sometimes forces traders to close positions before they work out.
- Pro: Day trading doesn’t require high margins.
Understanding the differences between day trading and swing trading can help you decide which trading strategy is best for you and your goals.