Day Trading vs Swing Trading – What’s The Difference?

Day trading and swing trading are two strategies worlds apart. Know the difference, and don’t assume it’s just a matter of trading frequency and time.

Every trade or investment is based on the same precept: buy low and sell high. That’s the one thing that ties together day trading, swing trading, and long-term position trading. But aside from this one precept, each style has enough differences that a trader specializing in one might find himself completely unfamiliar with the other.

But how different can it be, really? Isn’t it just a matter of ramping up your trading frequency, going for shorter profit targets, and limiting or expanding your trading duration? Yes, it is. And by virtue of those three things, day trading is a completely different practice from swing trading.

If you’ve tried both, you probably know that day trading isn’t swing trading sped up, and swing trading isn’t day trading slowed down. If you switch domains without changing your approach, you might fail to maximize your opportunities. If you’re not familiar with the differences, then read on–that’s what we’re going to cover here.

So let’s dive in, starting with the first, and often overlooked, factor: volatility.

The Smaller the Scope, the Greater the Volatility

If you’re a high-frequency day trader aiming for small profit targets, say five to 10 ticks, you often have to take larger positions to make your ticks worthwhile. How large a position you should take depends on many factors, but let’s save that for another discussion.

Suppose you’re trading anywhere toward the end of the rectangle at [1]. You go long. Suddenly, at [2], the YM spikes. You were shooting for a 10-tick profit, but the spike measured at 138 ticks!

In just one bar, the average volatility jumped up from an average of 12 ticks to 138 ticks–in short, a 1,050% spike! In short time frames (in this case, the 5 minute chart), such percentage jumps in volatility are common, and you have to be ready to handle them.

YM August 7, 2020 – 5 Minute Chart

In daily bars, a 1,050% volatility increase is very rare. But it’s common in the smallest time frames. So, if you had a fairly sizable position, and if you were “short” instead of long, such a spike can take a big chunk from your trading account, if not wipe you out altogether.

Remember, in short time frames, volatility and noise can be much more significant than in larger time frames, for which you probably would hold smaller positions in a more “stable” volatility environment.

Let’s take a look at the same day but from a swing trader’s perspective:

The day we observed using the 5 minute chart is designated by the red arrow in the chart above. It was a relatively uneventful day from a swing traders perspective.

The context as shown in the daily chart appears much less noisy, allowing the swing trader to execute a “cleaner” trade. The setup is quite simple:

1. As YM continued to trend upward, you might have expected a “measured move,” calculating the top and bottom of the first swing at [1], a total of 1,770 points.
2. Let’s suppose you entered at the breakout of the swing low at [2].
3. Taking a measured move approach, you would have added 1770 points to the bottom of the swing low, setting your profit target at [3] which is at the price of 27651. Simple and easy, right?

But can’t you lose money swing trading in the same way that you can day trading? Of course. But at least you don’t have to deal with frequent swings upwards of 1,000% on a regular basis.

In fact, such volatility is rare, as you can see below. The chart illustrates the March COVID-19 crash. It was a deep plunge, but it also took several weeks to happen; it didn’t happen in a single day.

The Cost of Missed Trading Opportunities

One of the most obvious key differences between day trading and swing trading is trading frequency. Day traders can trade multiple times intraday, while swing traders can keep positions open for one to multiple days.

The cost of missing a trade can be substantial–either missing out on a big winning trade, thus lowering your overall returns, or missing out on a big losing trade. But since we do our best to limit our downside by placing trades with favorable reward-to-risk ratios, adequately sizing our positions, and using stop losses in addition to loss limits, we’re more worried about missing a winning trade that might have significantly raised our overall profitability, rather than a losing trade whose negative return could have been capped by virtue of a stop loss or loss limit (risk management strategy).

The more you trade on an intraday basis, the easier it is to miss a trade (think: bathroom break, phone calls, kids, meals throughout the day, etc.).

Here is a simple scenario. Imagine four trades on a given day, two are winners and two are losers. Your losses are capped at -50 points, while your profits, though uncapped, are aimed at double your loss amount, or 100 points.

What might happen if you miss one trade, given this 2-to-1 risk/reward scenario?

• Take all trades, you finish the day up +70 points.
• Miss trade 1 (a winner), you are down -30 points.
• Miss trade 2 (a winner), you are up only 20 points.
• Miss trade 3 (a loser), you end the day +120 points.
• Miss trade 4 (a loser), you walk away with +100 points.

With your losses capped in the scenario above, you can see that the most negative consequences occur when you miss the winning trades. You can’t predict which trades are going to end up winners or losers. So if you have a strong system, and if your reward-to-risk ratio is favorable, it’s best not to miss any trades at all.

Now, this is a very simplistic example, but it does a clear job explaining our main point.

What about missing a swing trade? The cost of missing a swing trade can be equally harmful. However, the chances of missing a swing trade can also be less likely. If your swing trade has a longer trade span, say a day or more, it’s harder to miss simply because you might have plenty of opportunities to enter the trade even if you missed the initial entry point (time is even more forgiving for long-term positions which last weeks to months). This may shave off points from your potential profit (or loss), but since your profit target may be days away, you might still have a chance to enter the trade relatively early on. In contrast, day trades can have a much shorter trade span, from seconds to minutes–miss your entry, and you may miss a large chunk of your profits or losses.

The main point here is that the cost of missing trades can be significant and that the likelihood of missing trades is greater for intraday trades than it is for swing trades that span multiple days.

Converting Demo Performance to Live Performance

Here’s a quick note on converting demo to live performance, as this is typically what beginning traders do to measure their readiness for a live market. Let’s try a simple thought experiment (though you’ve probably already done this yourself using a demo and live account).

• You make 100 demo scalp trades, all aiming for short profit targets of a few ticks, and you succeed in most of them, yielding profitable results.
• You “demo” trade (on pen and paper), 100 long-term position trades, say in the stock market, yielding profitable results at the end of the year.

Which profitable “demo” scenario is likely to have produced similar results in a “live” market? The second one, of course. Since demo trades can’t accurately simulate the supply/demand forces of a live market, the shorter your time frame for trades in a simulated environment, the less accurate your results. For instance, you may not get filled in an ultra-short term scalp; your slippage may be horrendous; and compounding trading costs can quickly erode your profits or add to your losses.

In contrast, when demo-trading a longer-term position, the forces of intraday supply/demand are less of an issue, making your simulated results more aligned with your live results.

The main point is that if you’re looking to jump from a simulated market to a live trading scenario, the longer your trade span, or the larger your profit target and stop-loss, the closer your simulated results may be to reality. Scalpers who attempt to convert demo to live often get burned right away; only then do they realize how different the live market is from a simulation.

A Tactical Versus Strategic Environment

The narrower your trading timeframe, the more “market noise” you have to deal with. If you’re scalping the market, chances are you’re trading a lot of noise, looking for quick “tactical” setups to exploit near-term supply and demand which may or may not have a meaningful connection to the larger fundamental forces shaping the market.

Whether it does or not, your primary concern would be tactical rather than big-picture “strategic.” For instance, take the Emini Dow Jones (YM) on August 27, 2020. Below is a 1-minute chart that presented us with two scalping opportunities before the market started trading sideways in the late morning.

Let’s annotate these hypothetical trades blow by blow. In each example, you’re trading one contract:

[1] You go long on an upside breakout from a rectangle formation.

[2] The breakout appears to be false, as you get stopped out (-58 points)

[3] Another breakout occurs, and you go long again.

[4] Following a traditional tactic, you take profit (+93 points) at 100% of your formation (as measured by the top and bottom of your rectangle).

[5] A broadening top occurs and you go long again at the breakout.

[6] You take profit (+69 points) at the distance equivalent from the top and bottom trendline.

You end the morning with a total market profit of 104 points, or $520–not bad for one day.

Now, how might you have approached this scenario from a swing trading perspective?

Let’s suppose you were using a 1-hour chart for swing trading, Here’s what a more strategic scenario might have looked like:

You noticed that both the S&P 500 and Nasdaq have been reaching record highs throughout the week. The YM has not, but it’s correlated with the other two indexes, driven by bullish sentiment.

The upward trend leading up to the first trade is a small technical indication, yet it sets up a clear context for the trade, for which your directional bias is upward.

[1] The Jobless Claims report is positive but muted–not quite meeting consensus but showing fewer jobs lost than last week. You buy one contract, expecting the Dow to advance.

[2] For safety, you set a stop loss below the trend line. You are waiting for the opening of Federal Reserve Chairman Jerome Powell’s speech at 9:10 am ET, which the market expects to be supportive of sustaining low-interest rates.

[3] Powell’s speech calls for sustained easing, with a goal to “overshoot” the Fed’s inflation target of 2%. This is bullish for the market as low-interest rates usually are..

[4] The US home sales report delivers a blowout; also positive news.

[5] The market responds by selling off, but over the near-term, the two reports are generally positive, so you expect markets to recover, as it subsequently does. You move your stop loss to below the most recent swing low.

[6] It’s now the next day, and the YM has been hovering above your last stop loss. The personal income report was muted but favorable. But it’s also Friday, and you’re not sure you want to hold the positive over the weekend, so you close and take profit upon failure for the price to match its day highs.

You end the swing trading session with a profit of 341 points of $1,705.

Do you see the difference not only in the length of trade and points gained (or lost) but also in approaching the markets tactically vs strategically?

Differences in Trading Time

Can you handle sitting in front of your computer waiting for trading opportunities day in and day out? It’s one thing to sit at your desk working on a project, say for work. It’s quite another thing staring at your trading screen paying attention to most, if not all, of the nuances in market movement.

Day trading not only requires more focus, it’s arguably much more exhausting than swing trading. Many swing traders work off the daily charts. This gives you plenty of time to analyze and execute your trades. It can also be less stressful–you set your risk and profit scenario, and you let it play out. If you swing trade the one-hour charts, then yes, it’ll take more time. But it’s still relatively less stressful than watching your screen for hours on end, every single day, hoping not to miss a trading opportunity.

Since swing traders are focused on the bigger picture, they’re less burdened by second-to-second changes in the market. They’re able to use technical and fundamental tools to identify potential opportunities in a timely yet less-rushed manner. Day traders who often and willingly engage supply and demand at a “noise” level can’t afford to miss a trading opportunity, whether it has lasting significance in shaping the market or not. It’s a “be quick or be dead” mentality. It takes lots of more time, lots of more focus, and the price of your time and energy investment ought to be worth it, otherwise, you’re taking on more risk, more frequently, for a payoff that may or may not be worth the cost. So think long and hard about this and try both before dedicating your focus to either one.

Listen to our podcast: What is the best timeframe?

Focus, Research, and Experience

As we said early in this article (and it should be evident by now), day trading is NOT swing trading slowed down, and vice versa. For example, just because you’re trading the same chart pattern (say, a symmetrical triangle) in either scenario doesn’t mean that the difference between the two is in scale or frequency. There are major differences in the market’s “time” environment which require a difference in approach. Let’s go deeper and look at both approaches as something of a “discipline”–one requiring its own unique level of focus, research, and experience.

Remember that successful day trading or swing trading requires time, repetition, and the experience of both success and failure. Developing an “edge” in either case requires dedication; something you can’t achieve unless you master one or the other (at least in the early stages of your trading career).

For instance, there’s a certain level of tactical flexibility and time in-flexibility that day trading requires. If you’re trading a scenario that’s noisy, you might have to switch your setups because, after all, the event you’re trading–ultra short-term supply and demand imbalances–may be occurring at the noise level. This differs in swing trading, where your trade setup may be based on a larger supply and demand scenario, or on fundamental data or expectations.

There’s an inflexibility with regard to day trading–namely, you can’t afford to leave your screen for too long, as you may miss a trade. In swing trading, you don’t necessarily have to be at your screen once your trade has been planned or executed.

Swing trading may require near-term fundamental analysis in order to get a strategic view of the context. Day traders just have to know when big events are happening (i.e. FOMC announcement, GDP report, etc.). But beyond that, day traders are masters of minutiae–and the more skillful ones can make a living trading small and sometimes insignificant market fluctuations.

In short, the difference between day trading and swing trading goes much deeper than just timeframe alone. Both are completely separate disciplines that have their own requirements and their own rules of engagement.

Ultimately, deciding between the two depends on your own personal tendencies with regard to physical and mental stamina, reflexes, risk tolerance, capital resources, and emotional inclination–in short, your personality.

Capital Requirements May Vary

There are varying requirements for different asset classes and markets. For instance, if you’re interested in day trading stocks, you’ll need a minimum of $25,000 to be a “pattern day trader” without being penalized. In the case of equities, swing trading may be more suitable, especially if you don’t have an extra $25k to add to your account.

This isn’t necessarily the case in the futures market, though you have other funding challenges to consider. Competitive day trading margins can allow people to day trade contracts such as the emini S&P 500 (ES) for as low as $400 per contract, but to hold a position beyond market close, as swing traders often do, you may need upwards of $12,000. Not many traders can afford that. Fortunately, the CME now offers “micro” emini contracts–a tenth of the exposure to the standard eminis–so that an equivalent contract (MES) would require only, say, $100 to day trade and $1,200 to hold “overnight.”

In addition to capital requirements, another thing to think about is whether you can afford to trade at the frequency at which you plan to trade. For instance, we know that trading costs (commissions and slippage) can eat away at your profits and add more to your losses. In light of this fact, can you afford to day trade, say, five times, ten times, or twenty times or more a day without depleting your trading account? Something to think about.

The Bottom Line

Day trading and swing trading are two separate disciplines whose differences are to be found not only in their respective markets and time frames but also outside of the trading window (stamina, research, capital requirements, and everything else we discussed above).

Before you decide on one and the other, be sure to give it plenty of thought, and perhaps try your hand at both in a live market (simulations don’t really count at this stage of the game). Ultimately, it boils down to your personality and which style resonates with you the most. Be honest with yourself and capitalize on your strengths first before buffering up your weakness. In time, you’ll find what’s more natural to you, and once you do, that’ll be the start of your path toward successful trading.