Admit it. You’ve seen the price of a stock fluctuate hundreds of dollars in a single day and thought to yourself, “I should be trading stocks. I could make a killing.” We’ve all been seduced into the tempting, high risk, high reward world of short-term stock market trading. Unlike Warren Buffet and other investors who allow the stocks in their portfolios to ride out boom and bust cycles that can last for years, short-term traders risk their investments on minute fluctuations in the stock market. They ride the little ripples of ups and downs that occur every single day, and they profit (or lose) massive sums of money in the blink of an eye.
There are two types of short-term trading: day trading and swing trading. Each investment strategy has its own unique set of pros and cons, and both can generate huge profits or losses in a very short amount of time. A person involved with one strategy, either day trading or swing trading, will typically stick to that strategy only and not bother to give the time of day to the other. But are they really so different? What’s the difference between day trading and swing trading?
Defining the Terms
First, let’s take a look at what each type of trading is on the most basic level. Day trading is the buying and selling of financial instruments in a single day. A day trader will purchase and sell stocks, currencies, or other investments multiple times throughout the day based on tiny fluctuations in the market. No matter whether they make a profit or not, all trades are completed by the end of the day, and they start completely fresh the next day.
Swing traders utilize the same types of investments as day traders; however, they hold them anywhere from one to six days, depending on the market. Swing traders are less sensitive to the small fluctuations that occur in the daily markets. They instead focus on price momentum that can build over the course of a few days instead of a few hours.
Rise and Grind
While both investment strategies require a huge time commitment, day trading is considered more of a full-time gig. For day traders to profit, they have to constantly be monitoring their investments, which means they are sitting in front of their computers from sun up to sun down. Day trade intervals can be as short as 60 seconds; even getting up for a snack break can be nearly impossible with such short windows of opportunity. A lot of people that day trade consider it their full-time profession, whether they work independently or for an investment institution.
Swing trading requires an investor to be knowledgeable of the markets and savvy to its fluctuations, but as trades take place over the span of a few days and rely on slightly grander market forces, people making these types of trades are not nearly as tied to their computer screens. It’s possible to have a different and separate full-time job apart from trading while swing trading on the side. Swing trading is much more flexible and much less demanding on a minute-by-minute basis than day trading.
Pennies Versus Percentage Points
Another big difference between day trading and swing trading is the amount of money that can be made on each trade. As day trading relies more on daily market fluctuations and not overall market trends, profit margins are smaller. Day traders expect to profit by the fraction of a percent or a few percentage points at best on each trade. It works, however, because they make hundreds of trades per day. But it can be disheartening to make an important trade only to realize you’ve increased your earnings by mere pennies.
Swing traders shoot for increases in full percentage points, and experiencing profits in the twenty point range are not uncommon. You also have a little more leeway with swing trading. If you don’t make the trade at the exact top of the market, it’s still possible to make a healthy profit. The flip side of this is that’s there’s also more risk, and unfortunately, it’s easier to lose money in the big tidal swings of the day-to-day market.
Startup Costs
While both investment strategies require up-front capital that can be put at risk, swing trading can be a less expensive way to get into the trading market. To make good swing trades, all you really need is a computer, a conventional trading tool, and basic knowledge about trading. Yes, you need the capital to put up to make those trades, but they can be made pretty easily with a basic computer setup.
Day trading, however, is a harder market to break into as there are many more professionals investors already in this market. Trying to trade with just your brains and your laptop isn’t likely to work out well. Day traders need to invest in state-of-the-art trading platforms and charting programs to stay on the forefront of the markets; otherwise, they’re likely to get left in the dust. Commissions can also get quite high due to the large volume of trades being made daily.
The Bottom Line
Both day trading and swing trading are risky endeavors that should be left to professionals. While there is certainly money to be made in the short-term markets, long-term investing is the best strategy for most people. However, for those willing to take the risk and dive head first into the fast paced world of short-term markets, both day trading and swing trading can be ideal investment strategies that return huge investments and satisfaction.