Swing trading vs day trading – which is more profitable
Swing TradingDay Trading FrequencyMultiple trades per weekMultiple trades per dayNumber of TransactionsFewerMoreTime HorizonsPositions have long time horizonsPositions have short time horizons Time RequiredLess active time requiredMore active time requiredHow You TradeCan use your brokerage accountNeed up-to-date trading software
Day traders open and close multiple positions within a single day. In contrast, swing traders take trades that last multiple days, weeks, or even months.
Number of Transactions
Swing trading is still a fast-paced form of trading but involves making trades over a few days, weeks, or months. As a result, swing trading accumulates gains and losses more slowly than day trading. However, you can still have certain swing trades that quickly result in big gains or losses.
Suppose you’re a swing trader who risks 50% of your capital on each trade to make 1% to 2% on your winning trades, and suppose you earn 1.5% on average for winning trades, losing 0.5% on losing trades.
You make six trades per month and win half of those trades. So, you could make 3% on your account balance in a typical month, reflecting the fewer fees. Over the year, that comes out to about 36%, which sounds good but offers less potential than a day trader’s potential earnings.
Day trading attracts traders looking for rapid compounding of returns. The term “day trading” comes from the fact that traders typically buy and sell securities within the same day, often multiple times per day.
As a general rule, day trading has more profit potential than swing trading, at least on smaller accounts.
In the day trading community, it’s common to follow the 1% risk rule. This rule states that you should never risk more than 1% of your portfolio on any single trade. For instance, assume you’re a day trader who risks 0.5% of your capital on each trade.
If you lose, you’ll lose 0.5%, but if you win, you’ll make 1% (a 2:1 reward-to-risk ratio). Also, assume you win half of your trades. If you make six trades per day—on average—you’ll be adding about 1.5% to your account balance each day, less trading fees. Even making 1% a day would grow your account by more than 200% over the year, uncompounded.
Swing trading is a strategy that involves making trades over the course of more than a few days, weeks, or months. The goal is to capture short- to medium-term profits as trends change in a market.
Day trading uses multiple trades throughout one or two trading days to gather as many small profits as possible on daily price changes.
Both day trading and swing trading require time, but day trading typically takes up much more time.
Day traders usually trade for at least two hours per day. Adding on preparation time and chart/trading review means spending at least three to four hours at the computer. If you opt to trade for more than a couple of hours a day, your time investment goes up considerably and becomes a full-time job.
Both types of trading can take large amounts of time—swing traders might do more research while day traders do more trading.
Swing trading can take much less active trading time. For example, if you’re swing trading off a daily chart, you could find new trades and update orders on current positions in about 45 minutes per night. These activities might not even be required on a nightly basis.
If you make trades that last weeks or months, you may only need to look for trades and update orders once a week, bringing your time commitment down to about an hour per week instead of per night.
How You Trade
Since swing traders’ time horizons are much longer, they can use their online brokerage accounts to create positions and trade. They are under much less of a time crunch and don’t need to react within seconds of a price change.
To start swing trading, you will need to open up and fund an account with a brokerage. Once you are funded, you can begin placing trades on their platform.
If you’re day trading, you’ll need to have the most up-to-date software and technology to get the most out of your trading activity. Prices can change before you can even decide to make the trade, so automation is necessary to make trading profitable.
To begin day trading, you’ll need to have an account set up with a broker and have a computer system and software that allow you to see and access all of the information you need.
Which Is Right for You?
Swing trading and day trading both require a good deal of work and knowledge to generate profits consistently. However, the knowledge required isn’t necessarily “book smarts.” Successful trading is the result of finding a strategy that produces results, an edge, or a profit over a significant number of trades and then executing that strategy repeatedly.
Before you begin, take advantage of paper trading, which is the process of making hypothetical trades as if you were trading real funds.
Consistent results only come from practicing a strategy under numerous different market scenarios. That takes time and should involve making hundreds of trades in a demo account before risking real capital. Many brokers offer a paper trading demo account for free to allow you to learn the platform and practice your strategies.
Here’s what to consider when deciding:
- Stress: Day trading typically involves more stress than swing trading—it helps to know your stress tolerances.
- Pace: The pace of day trading can be rapid. Trades can carry on over days and weeks with swing trading.
- Focus: Because of the pace and short windows of opportunity, day trading requires sustained focus for extended periods. Swing trading still requires focus, but there are longer lapses between actions like entering or exiting trades.
- Freedom: Some argue that swing traders have more freedom, because swing trading takes less time than day trading.
Picking stocks for swing trading will involve a mixture of fundamental analysis and technical analysis. Fundamentally, you want stocks to exhibit certain traits based on the position you are taking. For example, if you take a long position (buy), you will want to see a reasonably priced valuation, strong earnings, and a healthy balance sheet. As for technical analysis, you can identify opportunities by using support and resistance levels and indicators that show volume and momentum.
Day trading is not as much about the type of investment as it is about trading on the price changes of the investment types you’re trading. Volume and momentum are important so that you can get in and out of trades quickly. Technical analysis, or trading using indicators, is critical to day trading, because you can spot trends in prices as they occur.
How much money you need to begin swing or day trading depends on what you’re going to be trading rather than how you’re going to trade. Forex, stocks, and futures all require different amounts of capital to start with.
Choosing day trading or swing trading also comes down to the trader’s personality and preference.
While the amount of capital you need to have varies according to the market in which you’re trading. No legal minimum exists to day trade the forex market. However, your broker might require you to maintain a specific amount of capital in your account.
One good rule of thumb is to start with at least $500, but $1,000 or more is best so that you can enter multiple trades.
Day trading stocks in the U.S. requires an account balance of at least $25,000. No legal minimum exists to swing trade stocks, but, again, your broker might have a minimum amount you need to maintain.
You’ll likely want to build up to and keep at least $10,000 in your account, preferably $20,000 if you’re looking to draw an income from swing trading. One good rule of thumb for swing trading is to have about $1,500 to start with. This amount of capital will allow you to enter at least a few trades at once.
There is no legal requirement for minimum account balances for day trading futures, but your broker might require that you keep a minimum in a margin account as with the other types of day trading.
The amount needed depends on the margin requirements of the specific contract you’re trading. For example, the Chicago Mercantile Exchange Group requires an account maintenance balance of $1,080 on E-Mini S&P 500 futures.
For day trading futures, it’s best to start with at least $5,000 to $7,500. These amounts depend on the prices of the futures contracts you’re trading. Day trading some contract types could require much more capital, while a few contracts, such as micro contracts, may require less.
A good amount to start swing-trading futures contracts is $10,000–$20,000.
The Bottom Line
One trading style isn’t better than the other; they suit different needs and styles. Day trading has more profit potential given the higher frequency of trading. With that said, swing traders still have plenty of potential for profit.
Capital requirements can vary across the different markets and trading styles. Day trading requires more time than swing trading, while both take a great deal of practice to gain consistency. Day trading makes the best option for action lovers. Those seeking a lower-stress and less time-intensive option might do better swing trading.
- Day traders typically buy and sell securities within the same day, often multiple times per day.
- Swing trading is still a fast-paced form of trading but involves making trades over a few days, weeks, or months.
- Capital requirements vary for day traders and swing traders, depending on whether they trade the stock, forex, or futures markets.
- Day trading may be a good choice for those who want higher profit potential, while swing trading may suit those who want a lower-stress option.
Frequently Asked Questions (FAQs)
Which provides a more reliable return, swing trading or day trading?
Neither swing trading nor day trading is necessarily more reliable. Some traders will be better at swing trading, while others will find more consistency with day trading. One small caveat is that, on a long-enough timeline, broad market indexes like the S&P 500 tend to go up. Swing trading has a more flexible timeline, which gives bullish index swing traders a bit more cushion to rely on these statistical trends.
What time frames should you use for swing trading?
The best time frame will ultimately depend on your trading strategy. In general, the timeline of the trade should reflect the pattern, event, or indicator that inspired the trade. For example, if a cup and handle pattern takes weeks to form, then the bullish follow-through will likely take more than a day or two to happen. On the other hand, if the relative strength index is oversold on the hourly time frame, then that trade might play out over a matter of days rather than weeks.