Swing trading vs day trading, what's one to do? Is one better than the other? There's pros and cons to both. And actually, you don't need to pick just one. You can do both like me!
Sometimes my life gets busy and I can only swing trade. At other times, I can slip away for an hour and place a day trade. So let's jump in and I'll show you how it's done.
It's important to know the difference between swing trading vs day trading. Not to beat a dead horse but as I mentioned in a few other posts, day trading is where you buy and sell stocks in the same day. You do not hold any stocks over night. Again, there are many different types of stocks.
A huge focus for day traders is technical analysis. You hope to capitalize on shifts in momentum and hop on the train when the time is right. Done correctly and you will see gains.
When it comes to swing trading vs day trading swing trading is a completely different ball game than day trading is. You need to rely not only on technical analysis but fundamental analysis since you hold overnight. Generally, you hold for a period of time, from one day to a few weeks.
Where things go sideways for many in day trading vs swing trading is using margin or “borrowed money” to trade (check out our stock basics page).
A lot of day traders generally use margin (borrowed money) to trade. Typically, day traders can borrow up to 4 times the amount of cash they're deposited into their account.
So, while this gives them more money and thus more potential to make a profit, they can also lose much more.
On the other hand, for those who hold positions overnight, think swing traders, it is generally limited to 2x (watch us do trading live each day in our trading rooms).
Think of swing trading vs day trading like this. Imagine you have a credit card with a $5,000 limit. The phone call comes, "you’re pre-approved for a credit limit increase to $10,000”.
Suddenly you think of the new trip you can take, gosh, you do work hard, you deserve it. I know you have all been in this situation. You jump on the offer.
Fast forward 4 weeks, your statement arrives in the mail. Well, now your new balance is $9,000 thanks to the all-inclusive trip to Jamaica at an annual interest rate of 19%.
Let’s say you commit to paying $200 a month. If you do the math, it will take you about six and a half years to pay off the credit card. Total Interest Cost Until Payoff is $6,870.34 the monthly interest alone is minimum monthly payments @19%.
Here's a nifty calculator to determine interest on your credit card.
I’m sure by now you see this hole you’ve dug for yourself and the same applies to trading on margin.
In fact, you have to pay interest on the money “borrowed” from your broker. Just like you would pay on the money “borrowed” from your credit card company. Here’s a handy article from Investopedia that explains how interest is calculated on margin accounts.
Moral of the story, do not accept the credit increase and be wary of margin. In fact, cut up your credit card all together.
In swing trading vs day trading you can actually lose MORE than your initial investment when trading on margin. Huh? What? Yep. You can. Unfortunately, margin trading can amplify gains as well as losses.
Here's how it is possible to lose more than 100% of your investment in margin trading. Let's say you have a $10,000 cash account for example. If you have a margin account you have access to an extra $10,000. This means you have $20,000 to trade with.
But, this money isn't free. The interest fairy will visit you! And you get to pay interest on it at a hefty fee of $425.
Nonetheless, you go ahead and enter a trade with the full $20,000, purchasing all the shares you can.
If, for whatever reason the stock plunges to zero. So that means in addition to losing your entire $10,000 investment, you're on the hook to your brokerage for $10,000 and the additional $425 in interest. All in, your total loss is $20,425.
When you lose at day trading on margin, you lose hugely. Stocks can move fast and the inexperienced can lose money fast.
In my honest opinion, the biggest mistake new traders make is using margin to trade. Essentially this equates to gambling. Moral of the story, do not trade on margin until you’re a seasoned pro.
Swing trading doesn’t rely so heavily on margin (you don’t have to use it if you don’t want to), so you don’t have to worry about winding up in debt.
That doesn’t mean swing trading is risk free (far from it), but there are relatively less opportunities to lose money based on the risk management rules I teach.
Make sure you know risk management for swing trading vs day trading.
It won’t take you long to figure out the market “moves” at certain times of the day. And this is when there is money is to be made in swing trading vs day trading.
From when the market opens at 9:30 a.m. until around 11:30 a.m. EST, is when the market will have the most trading volume and also the most volatility. This means lots of buyers and sellers which means that you can easily get in and out of traders.
I'd be remiss not to mention "power hour" or end of day trading.
These are the best times for momentum traders to trade!
Day trading requires a bigger time commitment. Since day traders change positions at such small intervals (1-minute, 3-minute, 15-minute, etc.) they have to constantly monitor their positions to make sure they’re still in a profitable place.
That is why a lot of people that day trade do so as a full-time job, either as part of a corporate institution or independently.
Swing trading uses time frames that are much longer - you generally hold your securities for several days and or weeks. You still have to make sure that you’re in a favorable position, but you have some breathing room.
It’s entirely possible to profit from swing trading on a part-time basis while holding down a full-time job in something else. This flexibility makes it a great option for people who want to learn how to trade profitably without devoting their entire lives to it.
Take, for example, the single mom who works a full-time, Monday to Friday job. She does not have the luxury to watch charts for set-ups in the am, she has to work. Because of this, swing trading would be a good choice for her!
Hence knowing swing trading vs day trading.
Day traders need a fast and flawless order execution platform and broker as their entry and exits are literally often only one or two seconds apart.
People often wonder how you do it so fast? The answer is: cutting edge trading platforms with a direct-access broker at your fingertips. I won’t get into all the nitty-gritty details but, you can find a break down of what it all means on our blog post DAS Trader.
And like most things in life, if you want the cream of the crop, you need to pay for it. This includes data fees, the software itself and the hardware (i.e. computer) that is powerful enough to run the software.
Luckily, once you invest in the proper hardware the rest is easy. Personally, once I saved up for my laptop, I was off to the races.
We really like the Thinkorswim trading platform and its free! All you need to pay for is the live data fees. What's more, with a Bullish Bears membership, you get free access to the live TradeIdeas stream. Alone this is upwards of $2,000 a year.
Meanwhile, swing trading can be done on an individual basis for relatively little startup money. In order to begin swing trading, all you need is a standard computer/laptop and conventional trading tools are all you need to begin swing trading. There are many free sites where research can be done.
As you can probably tell by this point, day trading can be stressful. Why? Because in a lot of cases you're monitoring your positions on a minute-to-minute basis.
One must be disciplined, decisive, and have more than a basic understanding of the markets. After all, you’re going up against corporate finance professionals who make their livings off of this.
What's great about swing trading is that with some studying, even those with no knowledge in finance can be successful.
Please don’t misunderstand me. It’s not necessarily “easier,” and there are definitely pitfalls to trading in general.
Not to rain on anyone’s parade but, trading can put you into debt - fast. The reason many traders fail out of the gates is because they don’t put the time in upfront to build a solid foundation of knowledge and skills. You might as well head to the slots in Vegas. I’m serious. You’ll be gambling.
We teach all of this to our members.
Every trader or aspiring trader is different. There’s not a one size fits all approach to a style that is going to work best for you. If you’re not ready to commit to trading full time, swing trading is generally the better and less riskier option.
For those of you who are interested in trading but don’t have a strong background in finance and work a full time job, your best bet is swing trading.
I hope this has cleared up the confusion. Luckily, Bullish Bears can teach how to make profitable swing trading decisions so you're not gambling.