Investment horizon is an important topic that fundamentally determines the type of trading. In the context of technical trading, we normally distinguish between two groups: day trading and swing trading.
In the case of short-term trading, the trader opens and closes his/her individual trades within a few minutes or hours and always before the end of the trading day. Since the speculative period is limited to one day, these trades are called day trading.
If the holding period of a position is a few days to weeks or even months, it is called swing trading.
The application of these two trading types and the requirements for traders are fundamentally different.
Day trading is often less suitable for employed people due to the time constraints since it is often necessary to keep an eye on price charts throughout the opening hours of the market.
When the National Stock Exchange opens at 9:00 AM, most people are probably at work or commuting and cannot follow price movements actively. However, full-time traders can actively monitor price changes and trades throughout the day. A full-time trader can also trade on other stock exchanges after his/her market hours.
Most people find it far more practical to limit themselves to medium to longer-term swing trading since the time involvement can be considerably less.
Swing trading is often the better solution for employed people since they don’t have to sit in front of a computer for hours and the decision-making process is slower.
Day trading attracts traders looking for rapid compounding of returns. Assume a trader risks 0.5% of her capital on each trade. If she loses, she’ll lose 0.5%, but if she wins she’ll make ~1% (2:1 reward-to-risk ratio).
A successful day trader makes approximately six trades per day, on average, and adds about 1.5% profit to her account balance each day, less trading fees.
Making even 1% a day would grow a trading account by more than 200% over the course of the year, uncompounded.
While the numbers seem easy to replicate for huge returns, nothing’s ever that easy.
Making twice as much on winners as you lost on losers, while also winning 50% of all the trades you take, doesn’t come easily. You can make quick gains, but you can also rapidly deplete your trading account through day trading.
Swing trading accumulates gains and losses more slowly than day trading, but you can still have certain swing trades that quickly result in big gains or losses.
Assume a swing trader uses the same risk management rule. He risks 0.5% of his capital on each trade with a goal of trying to make 1% to 2% on his winning trades.
Assume he earns 1.5% on average for winning trades, losing 0.5% on losing trades. He makes six trades per month and wins 50% of those trades.
In a typical month, the swing trader could make 3% on his account balance, less fees.
Over the course of the year, that comes out to about 36% uncompounded, which sounds good but offers less potential than a day trader’s possible earnings.
These example scenarios serve to illustrate the distinction between the two trading styles. Altering the percentage of trades won, the average win compared to average loss, or the number of trades, will drastically affect a strategy’s earning potential.
As a general rule, day trading has more profit potential, at least on smaller accounts. As the size of the account grows it becomes harder and harder to effectively utilize all the capital on very short-term day trades.
Day traders may find their percentage returns decline the more capital they have.
Their returns may still go up, since making 5% on Rs. 1 crore equates to much more than 20% on Rs. 10 Lac. Swing traders have less chance of this happening.
Focus and Training
Trading is a difficult art to master and requires a lot of time, concentration and hard work to generate profits consistently.
In order to be successful reading books is not going to enough, one needs to work out a strategy that suits their personality and also gives an edge. It should provide a significant amount of profits when executing it on a daily basis over and over again.
Every day represents a new challenge for the trader and the market moves in directions which can be unpredictable at times and hence, it becomes important to adapt your strategy as per the market conditions.
It is advisable to trade using a demo account first before risking your own capital in order to get a hang of the markets beforehand. Once you’re ready, you can open your account here.
That being said there is no substitute for real money and trading with real money gives you the confidence of handling the real-world pressures of losing money and also tackling the various difficult situations that occur in real-time.
Choosing day trading or swing trading also comes down to personality. Day trading typically involves more stress, requires sustained focus for extended periods of time and takes incredible discipline.
People that like action, have fast reflexes, and/or like video games and poker tend to gravitate toward day trading.
Swing trading happens at a slower pace, with much longer lapses between actions like entering or exiting trades. It can still be high stress, and also requires immense discipline and patience.
There is no real comparison between Day trading and Swing trading, it’s more about what suits your personality more.
Day trading is more suited to those who can invest more time to trading thus providing more profit potential. Swing traders generally prefer to grow their accounts over a larger period of time and their capital requirement is generally higher.
Swing traders also don’t have to spend a lot of their time trading and researching and require lesser training to gain more efficiency as compared to day trading which takes more time, training and focus to achieve the desired results.
Day trading makes the best option for action lovers. Those seeking a lower-stress and less time-intensive option can embrace swing trading.