Day Trading Vs Swing Trading: Understanding Potential Risk-Reward

In the capital market, you will see various types of traders.  They can be categorized based on their trading patterns. Two such primary categories are day traders and swing traders. To become successful in stock trading, you must know which type of trading suits you, day trading or swing trading. Let’s try to figure out what they mean and weigh into the debate of day trading vs swing trading.

As the name suggests, day traders open and close several positions during the day, and don’t hold stocks overnight. The swing traders are opposite of day traders in the definition. They hold onto their position for over days and sometimes even weeks and months in anticipation of making a larger profit from the deal. Active traders are often day traders or swing traders. Also, it’s not like one trading style is better than the other. Each style comes with its own sets of pros and cons and suits different traders.

Understanding day trading vs swing trading  

Financial Regulatory Authority (FINRA) has described day traders as those who make frequent ‘round trips’, at least four such transactions in five days.

Day traders usually participate in multiple trades in a day, often of small volume. Let’s say betting about 0.5 percent of their capital. So, loss from his trade will be 0.5 percent, but if he gains it will be 1 percent, meaning the risk-reward ratio for day trading is usually 2:1.

Day traders look at making profits from price discrepancies and typically don’t hold their positions overnight. They base their trading decisions on technical, fundamental, and quantitative analysis to identify stocks that will gain or lose maximum during the day.

The significant difference between day and swing trading is in the pattern. Swing traders usually hold onto their positions for an extended period and earn bigger share of profit than day traders. The difference also occurs based on the tools used and time frames consulted.

Usually, they wait for a trade to emerge over days to enter a long or short based on market movement. This policy is also adopted by traders who don’t get involved in the market daily.

Which one is a better trading strategy?

Day trading vs swing trading is a raging discussion, which one you should adopt depends on your financial goals. But both have pros and cons. The following comparison will help you to understand each better.

Day Traders Swing Traders
Make multiple trades during the day. Don’t wait for a bigger profit to emerge Swing traders observe trends, pick stocks that tend to perform better in a future date, sometimes in weeks or even months
Day traders continuously monitor the market for profit opportunities; one mistake can offset the profit earned in the day For swing traders, profit and loss situations emerge more slowly and may result in higher profit
Demands more involvement. Often day traders are full-time traders Swing trading doesn’t require constant involvement, and hence, it’s less stressful. Swing traders are often part-time traders
The leverage in day trading is usually four times of investment Since it involves holding onto a position for days the usual leverage one gets is two times the initial capital
Day traders love the excitement of trading against trendlines Swing traders base their decisions on technical analysis and trade in favour of the trend
The margin required for day trading is low The margin requirement for swing trading is higher than day trading

The goals of both day and swing traders are same, that is generating profit from their investment decisions. Despite all the arguments regarding day trading vs swing trading, both can result in a potential loss at times. Swing traders suffer from chances of a stop getting executed at an unfavourable price.  You can try the types to find out which one suits you better. You can attain success in either form if you stay committed to the three ‘Ds’ of stock market investment, namely, decisiveness, discipline, and diligence.