Day trading and swing trading are two ways to potentially increase your trading returns. In addition, both are short-term trading strategies.
Both can be quite volatile as well. Still, traders who can stomach short-term volatility may be rewarded with better returns.
But while these two trading styles have similarities, they have several differences as well. In this post, we will consider both the similarities as well as the differences between the two.
Let’s dive in and take a closer look at day trading vs. swing trading.
Day Trading: Ultra High-Paced Trading
Day traders use short-term price changes in order to turn a profit buying and selling stocks. Day traders get their name for a couple of reasons:
- Day traders must be able to trade during the day, while the markets are open. They buy and sell stocks usually all within the same day.
- The SEC refers to anyone who executes four or more trades within five business days in a margin account as a day trader.
Your average investor is certainly not buying and selling the same shares of stock in a single day. They also don’t live on their investment income until retirement.
But the successful day trader can make a modest income with a modest initial investment. Something to keep in mind about day trading is you are essentially flipping stocks; that means the more money you have for trading, the more you can make.
Swing Trading: Slower, But Still Fast-Paced
Swing trading doesn’t move quite as quickly as day trading, but it still involves buying and selling stocks within a short period of time.
These trades are executed over the course of several days or several weeks. In some cases, they may even happen over the course of a month or two.
Swing trading is unlikely to turn into a full-time career, though it can still yield better returns than more passive forms of investing.
It is also a bit of a double-edged sword. In theory, it should be less volatile due to trading less frequently, but this also means losses can be exaggerated, especially if trades are larger.
Minimum Equity Requirements
Day trading legally requires at least $25,000 of equity, per FINRA regulation. No such minimum exists for swing trading, but traders should have a healthy amount of working capital in order to provide adequate leverage.
A good starting point for swing traders would be $5,000 to $10,000. But, again, the more money you have available for trading, the more you can potentially make.
An important note is that the $25,000 minimum balance for day trading must be maintained at all times. If your balance falls below that level at any point, you must add money to your margin account before you can continue trading.
Day trading is one of the most active forms of trading. That can mean significant levels of stress, and for some, perhaps even an adrenaline rush. Think “Wolf of Wall Street” minus the pump and dump scheme.
The stress is largely due to how quickly things move. Because you are buying and selling stocks all within a single day, you can make – or lose – significant amounts of money very quickly.
The difference between swing trading and day trading is also somewhat evident in their names. While day trading involves dealing with very short-term, intraday changes in price, swing trading deals in larger, interday price “swings.”
Swing traders also have the option of stop-loss orders. Stop-loss orders or stop orders allow traders to buy and sell shares automatically at a given price; for example, sell at 15% below your purchase price.
Quite literally, the purpose of stop-loss orders is to stop your losses. If you purchase a stock at a given price and it unexpectedly starts to fall, you can proactively set a stop-loss order so that those shares will sell automatically if the price falls too much.
Not only does this make it easier to prevent excessive losses; it also prevents you from constant monitoring of your shares.
Both day traders and swing traders have access to leverage when executing trades. Leverage increases the capital available for trades, meaning traders can carry out larger trades than they otherwise could without leverage.
The typical amount of leverage for day traders and swing traders is 2:1. In other words, someone with $25,000 in their margin account can execute up to $50,000 worth of trades.
2:1 is the maximum leverage for margin accounts, but some brokers will allow up to 4:1 leverage as long as your leverage is reduced back to 2:1 by market close.
Yes, that means a trader with $25,000 of capital has access to up to $100,000 with leverage. This greatly increases the profit (and loss) potential for day traders.
Day trading and swing trading both require bigger time commitments than more passive forms of investing. That said, day trading takes up more time than most other forms of trading.
Most day traders don’t spend more than two to four hours conducting trades. But additional time is spent researching and preparing for the trading day.
Day Traders who use services such as Investors Underground spend time watching trading alerts and participating in morning calls to prepare for the trading day.
Those who want to make day trading a full-time job may indeed spend nearly 40 hours per week on everything that goes into it.
On the other hand, because swing trades are carried out over much longer time periods, this type of trading doesn’t require as much constant attention. It may not even require daily work; a few hours per week may be enough.
Both day trading and swing trading are popular because they offer traders the chance to make greater returns than a more passive investor. However, there are quite a few differences between the two.
For one, day trading, as its name suggests, requires a lot more daily attention. Many day traders make day trading a full-time job, often by choice.
Each trade is typically smaller with day trading, lessening the gain/loss potential for each trade. At the same time, the sheer number of trades means the profit potential is higher overall.
One downside of day trading is that it requires at least $25,000 of equity.
Swing traders conduct trades with far lower frequency, but the gain/loss for each trade can be larger. It also requires less time and less working capital.
Still, the profit potential for swing trading is lower, meaning it likely won’t allow you to quit your day job.
Each style of trading has benefits and drawbacks.