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Day trading and swing trading, which one is for you?

Day trading and swing trading are two of the most popular approaches to trading financial instruments. These trading styles both aim to take short-term profits from the market. The primary difference between the two is that in day trading, as the name suggests, the trader opens many positions during the day. But the swing traders hold onto their positions for more than one day. This article aims to introduce day trading and swing trading and some of the best strategies in each method, explaining proper entry and exit points. Additionally, you can find information about risk management skills that help you protect your capital. So, if you want to understand the basics of swing trading and day trading and the risks involved in each method, this article is an excellent start.

 

How to Analyze the Market

Eager to start trading? We’ll get there soon enough, but making money by trading in financial markets is more challenging than the media suggests. You need to have a comprehensible picture of the market to help you decide about opening or closing a position. Analyzing the market before swing trading and day trading involves conducting thorough research and using various tools and techniques to identify potential trading opportunities. The followings are some of the steps you can take to analyze the market effectively.

Understand the Basics

Before delving into market analysis, make sure you understand the financial instruments you wish to trade, such as stocks, forex, commodities, or cryptocurrencies. Different assets react differently to what happens in economic systems. Some investments, such as cryptocurrencies, have a volatile nature, and some, like gold, are more stable regarding price movements. You need to learn about the factors influencing asset prices, market dynamics, and common trading patterns.

Chart Patterns

Just like how they function in the real world, candlesticks in the trading world shed light on what is (probably) going to happen. That is, they illuminate the asset’s price movements and what they imply. Candlesticks make the trading chart more analyzable by forming different patterns such as head and shoulders, double tops and bottoms, triangles, flags, and many more. These patterns can provide valuable insights into potential trend reversals or continuations. Of course, a single candle can sometimes give you helpful information about what is to come. But in real-time trading, you cannot rely on a single candle or a single pattern. You need to combine them to solidify your prediction about the assets’ price movements.

Identify Trends

Rule number one in trading assets is that “trend is your friend”. Whether you make a profit or forfeit your capital depends on identifying the trendline in an asset’s price movements. In an uptrend, prices form higher highs and higher lows, while in a downtrend, prices form lower highs and lower lows. You need to enter and exit positions according to the trendline to increase the likelihood of winning. Candlesticks and chart patterns (among other indicators) can help you identify the trendline and examine its strength.

News and Economic Events

Novice traders are under the false impression that the chart is the only source they need to understand assets’ price movements. However, fundamentally speaking, the price movements of a particular asset on the trading chart are rooted in the asset’s reaction to what is happening in the real world, especially the financial world. Therefore, you need to stay updated on market news and economic events that can impact the assets you are trading. News releases can lead to sudden price movements and create trading opportunities. Of course, the opposite is just as probable, and the market news can result in devaluation of the asset and losses.

 

Swing Trading

Swing trading is a popular trading strategy used in financial markets, including stocks, forex, commodities, and cryptocurrencies. It involves attempting to profit from an asset’s short- to medium-term price swings or price movements. Swing traders typically hold positions for several days to a few weeks, aiming to capitalize on price fluctuations that occur within this time frame. The main idea behind swing trading is to identify and take advantage of short-term price movements, both in uptrends and downtrends. Unlike day trading, where positions are typically closed by the end of the trading day, swing traders can hold their positions overnight, enabling them to capture more significant price movements. Therefore, it is essential for swing traders to be more patient and keep themselves together as the prices move up and down.

The key principles of swing trading include technical analysis, trend identification, and risk management. Technical analysis involves studying historical price charts and using various indicators and patterns to make informed trading decisions. Swing traders often use tools like moving averages, MACD (Moving Average Convergence Divergence), RSI (Relative Strength Index), and Fibonacci retracements to identify potential entry and exit points. Swing traders use various strategies to find potential trading opportunities.

What are the best Swing trading strategies?

Breakout Trading

The breakout strategy is one of the popular strategies in swing trading. A breakout happens when an asset’s price goes above or below its current trading range. You need to identify the trend based on candlestick patterns and use the market’s history to identify the support and resistance levels on the chart. Once you find the support and resistance levels, you wait for the price break above or below them. Confirming the breakouts using various chart analysis tools is better because the price will return to its previous trading range. After you are sure about the breakout, you can open a position based on the support and resistance levels and data from the market’s past.

Pullback Trading

There are times in a trendline when the price moves against the trend for a short while and then follows the trend again. We call this price behaviour retracement or pullback. Some traders take advantage of the pullbacks by opening positions against the trendline direction for short-term profits. In pullback trading, you need to identify the trend first and then find the temporary price retracements, which usually take place during market corrections or price consolidations. You can get your hands on market analysis tools such as RSI or Fibonacci Retracement to find and confirm the pullbacks and open positions accordingly.

Moving Average Crossovers

Another trend-based strategy in swing trading is the moving average crossover. In this strategy, you need to deploy two or three simple moving averages (SMA) of different time periods on the chart. One of the SMAs is usually short (30 to 50 days), and the other is long (100 to 200 days). Of course, the duration of SMAs depends on the timeframe you are trading in. A crossover happens when the shorter SMA breaks above or below the longer SMA. When the shorter SMA breaks above the longer SMA, it indicates an uptrend (bullish signal), and when it crosse below the longer SMA, it shows a downtrend (bearish signal).

The Moving average crossover can help you take advantage of price movements within a specific timeframe. Swing traders monitor moving averages of different periods and use their crossovers as signals to enter or exit trades.

Mean Reversion Strategy

This strategy is based on the belief that prices tend to revert to their historical average or mean over time. In other words, when an asset’s price significantly deviates from its historical mean, it is expected to change its direction toward the average price. Therefore, the first thing you need to do to use this strategy is to find the average price using SMAs, exponential moving averages (EMAs), or any other measure of central tendency that suits your trading style. Then you need to find the occasions where the price has significantly deviated from the mean using statistical tools like standard deviation. You can set entry and exit points for your trades by finding the deviations. Technical indicators such as RSI and Bollinger Bands, as well as overbought/oversold levels, can help you fine-tune your entry and exit points.

 

What is day trading?

Day trading is a strategy where individuals buy and sell financial assets within the same day, attempting to profit from short-term price movements. Day traders do not hold positions overnight; they close all their trades before the market closes. This approach requires a high level of skill, discipline, and knowledge of the financial markets, as day traders must make quick and precise decisions in a fast-paced environment. The primary goal of day trading is to capitalize on intraday price fluctuations. Traders use various techniques, including technical analysis and chart patterns, to identify short-term trading opportunities. Day traders typically focus on liquid assets with high trading volumes, as these provide better opportunities for executing trades quickly and at desired prices.

What are the most popular day trading strategies?

Scalping

Scalping is a popular day trading strategy that involves making multiple trades throughout the day to profit from small price movements in financial instruments. Scalpers (traders who use this strategy) enter and exit positions within minutes or even seconds, relying on small price movements for profit. The goal of scalping is to accumulate numerous small gains that, when combined, create a profitable outcome. Scalping strategy requires liquid markets with enough buyers and sellers to quickly execute the trades without significantly changing the price. Moreover, scalpers thrive on market volatility, providing them with more trading opportunities.

Momentum trading

In momentum trading strategy, traders look for assets with strong and persistent trends. Momentum traders believe when the price is moving in a strong trend, it will continue to do so for a short time. They open positions early in the trend and ride the momentum for potential profits. An essential part of momentum trading is identifying and confirming strong trends using market analysis tools such as MAs and RSIs. Once they confirm the strong trends, they open positions, hopefully at the beginning stages of the trend, to maximize the profit. They also have predefined exit points, often using stop-loss orders, to lock in profits and limit potential losses. Like scalpers, momentum traders execute several trades daily, looking for various opportunities across various assets.

Reversal trading

Unlike the momentum trading strategy, reversal trading is used when a trend is losing its strength. Reversal trading involves taking positions opposite the prevailing trend in anticipation of a price reversal. Reversal traders aim to profit from the potential change in the direction of an asset’s price movement. This strategy assumes that a trend is weakening and a reversal or significant retracement is likely to occur. Reversal traders elicit trading signals from candlestick patterns, overbought/oversold levels, RSIs, etc., to open positions on the trend’s dying breaths. Of course, like other strategies, you must wait for signs confirming the trend is reversing.

Range Trading

Range trading strategy, also known as sideways trading or channel trading, involves identifying and trading within specific price ranges or channels. Traders who use range trading strategies aim to profit from the price’s back-and-forth movements (oscillations) between well-defined support and resistance levels. This approach is particularly suitable when the market lacks a clear trend and exhibits sideways movement. Range traders look for assets that are trading within well-defined price ranges between clear support and resistance levels. They buy at the lower end of the range and sell at the upper end, profiting from price oscillations. Range traders seek to buy at or near support levels and sell at or near resistance levels. They aim to profit from the price oscillations within the established range.

Read more on short-term trading strategies here.

 

Day Trading and Swing Trading Differences

Day trading and swing trading are both popular trading strategies used in financial markets, but they differ in their timeframes, holding periods, and trading objectives. Below are the main differences between swing trading and day trading.

Timeframe and Holding Period

Day traders usually execute several orders on trading day, but none of the orders are active overnight. In other words, in day trading, the maximum time for an order to be active is one day, and if the order does not reach its target or hit the stop-loss level, the day trader closes the position manually. On the contrary, swing traders execute orders that are active from as short as a few days to as long as a few weeks. Swing traders are willing to hold on to their positions in the hopes of higher returns.

Trading Frequency

Day traders execute far more orders than swing traders. Day traders enter a trade whenever they find an excellent entry point and exit after a short while (maximally for one trading day). This requires day traders to constantly monitor the market and quickly react to the chart’s behavior. Therefore, day trading is suitable for full-time traders. Conversely, swing traders execute fewer orders in longer time frames focusing on capturing larger price swings. Swing traders do not need to sit by their laptops and observe the price movements. They place their orders, leave, and come back after one or a few days to check the result. Since swing trading does not require the trader’s constant presence, it is more suitable for those with full-time jobs who trade on the side.

Trading Objective

Day traders aim to capitalize on short-term price fluctuations. They open several positions which are active for a few minutes or hours and hope to make multiple small profits. Put differently, day traders accumulate profits from multiple trades with small profits instead of one large trade. Inversely, swing traders focus on identifying and capturing significant price swings in a longer timeframe, resulting in larger profits per trade than day trading.

Risk and Reward Profile

Day trading involves higher risk due to the rapid pace of trading and the potential for significant price fluctuations within a single day. While the profit potential can be substantial, the risk of losses is also elevated. Swing trading carries a different risk and reward profile. While the holding period is more extended, swing traders are exposed to overnight market risks, such as news events or gaps in prices. However, swing trading allows for more relaxed decision-making and potentially larger profit targets.

Risk only what you can afford to lose.

Both swing and day trading can be profitable if executed with discipline, risk management, and a well-defined trading plan. Traders should choose the approach that aligns with their risk tolerance, time availability, and trading preferences. It’s important to note that both strategies involve inherent risks, and aspiring traders should educate themselves and practice with a demo account before trading with real money. The following table summarizes the differences between day trading and swing trading.

Day trading vs swing trading

Read more about the differences between day trading and swing trading here.

 

Risk Management

Risk management is a crucial aspect of trading and investing in financial instruments. Without risk management, it is only a matter of time for you to lose all your capital. Risk management tells you how much you can afford to lose in a single trade so that you do not put all your money at stake. It incorporates a set of techniques and strategies designed to control and limit the risk you expose yourself to in financial markets. Effective risk management helps traders and investors preserve their capital and maintain financial stability, even during turbulent market conditions. The followings are some of the essential risk management skills that help you mitigate your losses.

Position Sizing

You should decide the size of your positions relative to your investment size. It is best to determine the appropriate size of each trade based on your risk tolerance and the amount of capital you’re willing to put at risk. Also, you should avoid allocating a significant portion of your capital to a single trade, as this could lead to substantial losses if the trade goes against you. A common rule of thumb is to risk only a small percentage of your total capital (e.g., 1-2%) on any individual trade.

Stop-Loss Orders

A stop-loss order is a predefined price level at which your position will automatically be closed to limit losses. It is the most common way to control the amount you are willing to risk is by setting stop-loss orders. You should consider stop-loss orders an integral part of your trades, not an extra condition. Setting a stop-loss ensures that your losses are capped at a predetermined level and prevents emotional decision-making in the heat of the moment. Stop-loss orders put your mind at ease that no matter where the price goes, your losses are limited to a predetermined amount.

Risk-Reward Ratio

The risk-reward ratio indicates how much you expect to win by exposing a specific amount of your capital. You should assess the potential reward relative to the risk for each trade and aim for trades with a favorable risk-reward ratio, where the potential profit is significantly larger than the potential loss. For example, a risk-reward ratio of 1:3 means that for every dollar you risk, you expect to make three dollars in profit if the trade is successful. The risk-reward ratio is flexible and changes according to your trades’ profitability.

Diversification

You have heard of the idiom don’t put all your eggs in one basket. The idiom works out for the financial markets as well. You should avoid putting all your capital into a single asset or a few correlated assets. It is best to diversify your portfolio across different markets, industries, or asset classes to spread risk. If one asset performs poorly, other assets in your portfolio may offset potential losses. In other words, by diversifying your portfolio, you hedge your investments against each other. So, when the value of one asset in your portfolio decreases, an increase in another asset’s value offsets the losses you incurred in the former. Diversification requires a fundamental knowledge of the market, which helps you choose uncorrelated assets.

We should note that no risk management strategy can eliminate all losses, as trading always carries inherent risks. However, by applying effective risk management techniques, you can significantly reduce the impact of potential losses on your overall trading or investment capital. Moreover, risk management is a subjective factor in trading, and you need to manage the risks based on your trading style and investment size. You cannot simply copy another trader’s risk management strategy and expect it to work out for you too.

Final words

In this article, we tried to elaborate on day trading and swing trading as two of the most popular trading styles among traders. We also clarified the difference between the two, which was mainly the active time of orders and their frequency. Day traders can use strategies such as scalping and momentum trading, and swing traders often use strategies like breakout trading or pullback trading. Both day traders and swing traders need to have a comprehensive risk management scheme in terms of position sizing and risk-reward ratio, which helps them control their losses.

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