Swing Trading vs Day Trading: What's the Difference?

Playing the financial markets to generate profit is a complex and challenging endeavor. It's made more difficult by the fact that there are several fundamental approaches you can take to investing. 

Two of these approaches, swing trading and day trading, are often hard to understand because they have so many similarities to each other. Yet even though swing trading and day trading are similar, they're also different in some very important ways. Here's how to understand these differences.

What is Swing Trading?

A type of fundamental trading, swing trading is defined as investment activity that lies somewhere between the incredibly breakneck pace of day trading and the slow, plodding pace of trend trading or long term investing. Investment hold periods are short to medium in length, anywhere from a few days to even a few weeks depending on the circumstances. This "middle ground" approach results in profits per successful trade higher than those associated with day trading at a quicker pace than you would get with trend trading.

Swing trading is highly dependent on selecting assets that have both the right level of liquidity and volatility. Too little of both and there are fewer opportunities to profit on a trade, even after a few weeks; too much, meanwhile, could lead to heightened risk of losing your investment if the valuation of that asset falls below its purchase price. Swing trading is highly dependent on market conditions as well, which means that it takes a smart, educated investor with their fingers on the pulse of the relevant asset prices to know which way they will shift.

What is Day Trading?

Day trading, much like swing trading, is an investing activity that involves short-term buying and holds of assets to sell at a profit. At its core, day trading can be thought of as several trades a day with small profits per trade - making the overall outcome attractive enough. Day trading is intrinsically different from swing trading in that these buy and hold times are remarkably short in comparison - day traders never keep their positions open past the end of a single day of trading. Instead, an open position is closed after mere hours or even minutes, leading to day trading being much faster-paced than swing trading, even though they both involve short-term holds.

Again, day trading relies on many of the same technical analysis tools that swing trading does, except at a much faster pace. Day traders monitor the markets extremely closely so that they can capitalize on even the smallest shifts in asset valuations, inputting sell orders whenever the asset they're holding indicates profitability. Then, day traders will often take the proceeds from that sale and reinvest it several more times that day to compound their profit margins. To automate this, day traders often use advanced trading algorithms, as this can speed up the process even further.

Day Trading vs. Swing Trading

When it comes to day trading versus swing trading, direct comparisons are the most useful in understanding some of the most noteworthy differences. Timing is one of the core ways the two trading activities can be compared, as day trading relies upon making multiple trades per day and relies upon trades that last hours or even minutes. Furthermore, because of the attention to detail necessary to ensure you don't miss any opportunities, day trading is often considered a full-time job that relies on cutting-edge trading platforms and tools. The goal is to accumulate a multiple string of small gains over time.

Swing trading's timing is much different. Open positions are measured in days to weeks, and watching the markets to monitor asset market valuation is more of a part-time job. Patience is your friend and your foe here - the added variable of time can magnify or reduce returns. Possible gains are larger than with day trading, but these gains happen much less frequently. Whereas the tools day traders use focus on using technical analysis much as swing traders do, swing trading is most concerned with trend and momentum indicators. Finally, swing trading can be accomplished with a standard brokerage account, though more advanced tools and platform capabilities do add plenty of value.

Advantages and Disadvantages of Swing Trading

Swing trading's biggest advantage is its accessibility. Anyone with investment capital and the requisite knowledge can get started in swing trading, and because the longer time frame doesn't necessitate watching market fluctuations as closely as day trading, new swing traders can easily experiment part-time. Other advantages include being able to set stop-losses that automate the process to a degree, a smaller upfront investment, and greater potential for larger returns as larger price movements become more likely as you hold your position for longer.

Disadvantages, however, exist as well when it comes to swing trading. The same longer time frame that's advantageous also leads to increased risk that conditions will change negatively, thus wiping out your investment. This also means that your investment capital will remain illiquid longer than with day trading due to these longer hold times. While swing trading doesn't require the attention to detail that day trading does, it's also often considered more "boring" in that swing traders need to adopt methodical and slower approaches when compared to the breakneck pace of day trading.

Advantages and Disadvantages of Day Trading

Day trading is often held up as a mirror to swing trading, and for good reason. The advantages of this trading method include the extreme speed in which trades are made, which makes it as exciting as it is challenging. Day trading can be automated very well if you have access to algorithmic trading programs, provided you configure them carefully and backtest them against historical data prior to letting them loose on live markets. Also, because day trading profit margins are smaller, it's less likely to have a cripplingly unsuccessful trade than it is with swing trading.

Yet the disadvantages of day trading are also clear. Even with careful automation helping streamline the process, day traders have to pay constant attention to market fluctuations, making it clearly a full-time job that requires nearly all of your concentration. And even with the most solid strategies at your disposal, it's still entirely too common for you to spend weeks or even months before generating overall profit from your trades. Additionally, day traders need to use margin accounts that maintain a minimum balance of $25,000 at all times due to market regulations, which means capital requirements are higher than those of swing traders.

How Much Money Do You Need To Start Trading?

You need to spend money to make money, and swing trading is no different. How much investment capital you want to devote to your swing trading activities can be variable, as there are no market-wide minimum balances that you need to maintain. However, it's still advisable to begin with around $10,000 in investment capital, limiting each swing trade to anywhere between $1,000 to $2,000.

Day trading has a much higher financial barrier to entry. Because of the legal minimum capital requirement of $25,000, it is likely useful to begin with a balance of around $30,000 to offer you flexibility and some cushion for potentially losing trades. Most experts agree that day traders should limit their investments to 1 percent of their account balance on a single trade.

The Risks of Swing Trading and Day Trading

Swing trading has unique risks associated with it, and the most noteworthy is how swing traders are exposed to overnight and weekend asset value gaps. Market reversals that occur abruptly and without warning are also major risk factors, and this highlights the importance of selecting assets or markets that have enough volatility to profit from but not so much volatility to become unpredictable. Being able to identify when and how volatility reaches this high-risk threshold takes skill and experience. 

Day trading has similar risks, especially those related to volatility. This is especially relevant because higher-volatility markets represent better opportunities for ultra-short-term profit, but also increase associated risk by the same margin. Day trading also relies heavily on being able to interpret technical analysis signals clearly and carefully and being able to make quick decisions logically and without relying on emotionality - something that's often a challenge for many day traders.

What can Composer Do For Swing Traders and Day Traders?

Both day traders and swing traders need a full, robust set of tools in order to trade successfully. Access to brokerage accounts is just the first part of this equation, as it's also necessary to have solid technical analysis and data visualization tools at your disposal to monitor markets closely. Being able to avail yourself of tools and historical data to design and backtest trading automation also adds to the potential for success. Finally, having a robust community of like-minded individuals to speak with and learn from provides countless opportunities for new and experienced traders alike.

All of these capabilities and more are available from an online trading platform like Composer. Access to historical data, technical analysis and data visualization, and a burgeoning community of traders and investors can all enhance your abilities as a day trader or swing trader. Additionally, Composer's unique and user-friendly "no code" automation-building feature means it's never been easier to streamline your trading activities using methods you can trust.

While there are fundamental differences between them, both day trading and swing trading are complex active trading methods that require high levels of dedication, discipline, knowledge, and access to specialized tools. These are ‘ever-evolving’ trading styles. Partnering with a full-featured online trading platform like Composer offers you dozens of advantages that can make your swing trading or day trading simpler.