Swing Trading vs. Day Trading (2023): In-Depth Comparison ⚖️ (2024)

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Want to be your own boss and lead an adventurous life?

Or perhaps you’d prefer an excellent side gig?

Both sound very enticing, and—and especially over the past few years—many followed these promises. While swing and especially day trading have traditionally been the province of institutional traders and the very rich, recent years have opened the floodgates for the small investors, including retail traders.

At first, the old guard of trading saw these newbloods as little more than “dumb money”, but now, even they are paying attention. This, of course, doesn’t mean that this monicker for newly forged rookie investors is completely out of place—many have tried their hand at day and swing trading, and many have lost a lot more money than they could afford.

Let’s learn how to successfully engage in these forms of trading, and compare them so that you can easily figure out which one is right for you.

Sound good? Let’s jump in! 👇

A Quick Overview of Day Trading ☀

Day trading refers to the practice of making numerous small purchases or sales of securities and derivatives throughout the trading day. This form of stock market activity has become increasingly popular among the general public over the last few decades due to increased availability provided by online brokers such as Robinhood.

Furthermore, day trading has received another boost amidst the boredom of the Covid-19 lockdowns arguably leading to the rise of the first universally accepted meme stocks. Before these developments, this kind of trading was mainly available to industry bigwigs and people employed by large funds.

In fact, many of the highest earners from day trading are these insiders as they have the capital, training, information, and tools necessary to day trade successfully. The importance and profitability of various types of insider information came in a rather stern warning from senator Mark Warner about potentially harmful day trading habits among the representatives in Congress. 📝

Day traders most often buy and sell forex, options, and similar derivatives though they tend not to shy away from other assets available on the stock market if they see a ripe opportunity.

They employ numerous techniques and sources both to find the best trades and to profit from them. Some of the most common sources of information include financial news from varied sources, analysis of stock market charts and patterns both manually, and—as is often most efficient and reliable—with the help of top software for day trading.

Similarly, there are many strategies a day trader can employ to make money. Some of the common ones include shorting, scalping, arbitrage, trading news, mergers, and acquisitions—many also consider swing trading a regular subset of day trading—all with various degrees of risk and profitability.

The Basics of Swing Trading 📙

Despite their similarities, swing trading is clearly distinguishable from day trading. While day trading happens over the market day—with few day traders keeping any positions open overnight—swing trades tend to take days, and sometimes weeks to execute.

You should keep in mind that these timeframes are the most common ones for swing trading—and certainly not a law written in the stars. Indeed, this form of market activity can stray into a day trader’s territory.

Even dedicated swing traders might make multiple trades per day in times of high volatility, like the one the World is likely to face throughout 2022 based on the behavior of multiple major banks in the U.S. 🏦

The longer lifespan of individual trades when swing trading means that both the losses and the earnings from individual puts and calls tend to be greater than with day trading. Fortunately, a swing trader can rely on fundamental as well as technical analysis due to the longer timeframes in question.

Additionally, swing trading has garnered less negative press than day trading so it carries less potential stigma and has more lax regulations attached to it. This lack of direct scrutiny shouldn’t lull you into a false sense of safety when doing this kind of market activity though.

For example, the fact that Senator Warner’s rebuke was primarily aimed at day trading, doesn’t mean that similar unofficial rules don’t apply to swing trading—and that is only in regards to some of your other potential fellow swing traders.

What are the Differences Between Day and Swing Trading? 🤔

While swing and day trading are certainly not-too-distant cousins, they boast a number of key differences—the time required to successfully trade, the money you’ll need to even get into it, the type of brokerage account required, the tools a trader uses, as well as legal needs that have to be met. And that’s just to name a few before delving more deeply into the topic.

How Much Time Do You Need to Trade Successfully? ⏲

To put it simply, day trading should be regarded as a full-time job while swing trading is more akin to a serious hobby. Since day traders make all their money and complete all their trades within a single day, they need to be very active while the market is open.

This means that they spend 2 or more hours every day staring at a screen—and often multiple screens—trying to find the right opportunity to place a put or a call option and hopefully end the day a little bit richer than they started it.

While a full-time job that might require as little as two hours per day might appear appealing at a glance—especially compared to the usual 8+ hour office slog—you should keep in mind that those hours are going to be brimming with stress. ⏳

Additionally, individual day traders don’t benefit from any real safety nets. This is especially dangerous in the first months of a day trader’s career with some sources claiming that a vast majority of rookie day traders end up completely draining their account and going into debt without ever making any actual money.

One somewhat famous example of a successful investor turned broke day trader came in late 2020 when a guy that goes by Matthew Jay on Youtube lost $127,000 out of his saved-up $150,000 during the initial covid-19 lockdowns.

Swing trading is a different story. Since most positions are held over night, the trader needs to spend less time during the day in front of a screen. It is possible to set up all the trades in a few hours before or after work and go about your day. 🗓

This, obviously, doesn’t mean that swing trading is without risk—swing traders risk a lot due to overnight price changes, and error margins are far smaller than with more long-term forms of investing. On the other hand, due to lower time requirements, stress and burnout are less of a factor, and swing traders can benefit from various stock orders that can help limit losses if the prices stray too far off the mark.

How Much Money Do You Need to Start Day Trading or Swing Trading? 💰

There is nothing wishy-washy about the minimum capital required to start day trading—$25,000. In fact, this isn’t even a rule of thumb or general advice, it is the legal minimum and if your account falls below this amount, you won’t be able to make any additional trades until you fix the issue.

Obviously, this means that you will need more money than this to start trading as it is highly unlikely that you will never lose any money on trades. Most sources advise day traders to have at least $30,000 in their account and we tend to concur with this advice.

The benefit of starting out with $30,000 is twofold. First, it gives you some wiggle room even if some of your trades go sour. Even if you effectively lose $4,000 on trades, you can still continue trading to hopefully recoup your losses. 📈

Second, it ensures you can make decent-sized trades without risking too much. Once again, the general advice is that you should never venture more than 1% of your total assets on a single trade, and once again we would tend to concur with this council.

While swing trading has far fewer rules attached to it than day trading, never risking more than 1% remains a rule of thumb. This means that it is a bit pointless to start swing trading without at least $5-10,000 in your account.

Since every dollar you risk will hopefully carry a potential gain of at least $2-3, ideally this should ensure that you never stand to lose more than $50-100 on a single trade and that ever put or call can gain you at least $200-300.

Additionally, having more than $5,000 should ensure that even if you face a losing streak, you should still have more than enough money to make successful trades to win back your money and ultimately profit. 💷

On the other hand, the fact that you shouldn’t start swing trading with less than $5,000 doesn’t mean you can’t do it with vastly larger amounts of money—there isn’t a real upper limit.

Note however that none of this means that you should venture all of your savings on either day, or swing trading. Furthermore, you should avoid the rookie mistake of impulsiveness—a losing streak doesn’t guarantee that a winning one will follow, and if recouping your money means going into debt, it is often better to just quit.

Which is Better for Beginners: Swing or Day Trading? 👨‍🏫

Swing trading is definitely a better starting point for an aspiring trader for multiple reasons. The first and most obvious one is that you don’t have to quit your day job to do it—meaning you’ll still hopefully get a paycheck at the end of the month even if you aren’t good at it.

A swing trader also needs less financial literacy—since trades aren’t happening at a lightning pace fewer split-second decisions are needed and you have more time to think and double-check. Now, don’t get us wrong, it is incredibly foolhardy to go in any form of investing without having a more-than-basic grasp of technical and fundamental analysis. 📊

These two forms of analysis are crucial for anyone striving for success on the stock market as they can transform even the most gambly practices such as binary options trading into something legitimate—and save you from a lot of trouble.

For example, an old staple of technical analysis—the Dow theory—can be useful for a swing trader. While it is mostly associated with longer-term investing, learning to recognize its secondary trends can be worthwhile as their timeframes tend to coincide with the timeframe of most swing trades. 📖

Another reason why swing trading tends to be better for beginners is the fact that day trading is often a real adrenaline rush—making day traders far more susceptible to impulsiveness which is one of the surefire ways to go broke.

The final major argument against day trading as a beginner is that you’ll need a lot more tools to successfully day trade. This concerns both software and hardware as it is impossible to follow all the data you need and execute all the trades in a timely fashion using just a pen and some paper.

How to Start Day Trading as a Beginner? 👷‍♂️

On the other hand, some traders might choose baptism by fire and go straight to day trading. This way isn’t without merit as stress-testing yourself can be a quicker way to learn. However, if you choose this path you should do your first months of trading in a simulation.

You could do this by hand by finding the precise charts for some past period on the stock market and trying to make money based on those fluctuations, or you could use software that allows you to trade fictional money in real-time. Either way, if you are a rookie you should not risk your real savings before you get a hang of day trading.

Lastly, no matter which of these two you choose to begin with—day trading or swing trading—finding a trustworthy stock picking service can really help you along the way. It can give you a good primer on finding the best trades, and save you a lot of time, especially as you are learning how to truly analyze stocks.

How Profitable is Day Trading vs. Swing Trading?💵

Unfortunately, it is incredibly hard to give a straight answer to the question of day vs. swing trading profitability. Most traders don’t really make their earnings public information, and just looking at the biggest known outliers—both the winners and the losers—isn’t terribly useful.

That being said, day trading does theoretically have a higher earning potential—since the trades executed are far more numerous, they can cumulatively give huge yearly returns. This is obviously the case if most or all of the trades are winners.

On the other hand, many of the brokers available have some trading fees, even if they are small, that can really eat into your earnings—the problem tends to get worse the more you trade. 🚧

Some argue that even truly comissionless brokers carry hidden fees as they incentivize more reckless behavior—after all, why shouldn’t you make 100 trades a day instead of 10 if you don’t pay any additional money for any of them.

Furthermore, the exact future of low and no-cost trading platforms is becoming somewhat uncertain as the SEC is looking to regulate different psychological tricks various brokers use to incentivize impulsive trading which has the potential of affecting future policy.

No matter the future of commissions, swing trading is likely to be more cost-effective as fewer trades are executed, and the trades that go through tend to be larger than with day trading. 🎯

The bottom line is that both swing and trading can be incredibly lucrative as long as you are skilled, disciplined, and lucky. On the flipside, both swing and day trading carry significant risk, especially for beginners—though even seasoned traders can take big hits. Trades can cost you a lot in fees and commissions and tend to put you in unfavorable tax brackets due to their short-term nature.

What are the Taxes on Day and Swing Trading? 💸

Since taxes are—alongside death—unavoidable in the stock market, just as in life, they will be a major consideration for all aspiring traders.

The truth is that taxes on stocks are divided into two main categories—the more favorable long-term taxes, and the more punishing short-term ones. As you have to hold your purchased securities for more than 365 days to find yourself in the cheaper bracket, you’ll have to fork over more of your earnings to Uncle Sam in almost all cases when dabbling in day and swing trading.

Don’t think that the fact that short-term taxes can go up to nearly 40% while the long-term ones don’t climb over 20% in most cases is the worst bit. Depending on the state you live in, you might have to pay state capital gains taxes as well. 🌎

For example, if you are a trader from Alaska you’re in luck as the overall tax burden there is just over 5% and those of you in New York aren’t nearly as fortunate as you pay just shy of 13% to the state.

Taxes might also become a bigger and more confusing problem across the board in the future as many states are working on changing some of their regulations on top of the upheaval caused by the high inflation rate. 📉

On the bright side, there are legal ways to lessen your tax burden. The main one is called tax-loss harvesting and it involves using your trade losses to offset some of the capital gains taxes you have to pay.

In fact, some strategies involve intentionally making some sub-par trades just to maximize savings achieved by using this method. However, since such strategies could increase the already high number of trades you are likely to be executing, you should be extra wary of broker’s transaction fees.

The Good and the Bad with Day Trading ⚖

To start off on a positive note, day trading has many genuine pros. It has immense potential for earnings. It is pretty fun—while the adrenaline rush you can get from day trading can lead to rashness and imprudence, there is little doubt that making successful trades is a blast.

It has several benefits of being self-employed the main for many being not having an oppressive manager. It also has somewhat flexible hours. While you do have to be active when the market is open, you have some wiggle room as to how long you want to trade on any given day.

Finally, while knowledge and practice are basically compulsory if you want to day trade successfully, there are numerous, excellent, and readily available resources to get the know-how.

On the other hand, day trading requires a hefty initial investment both in terms of the $25,000 account minimum, and the software and hardware needed to start. Additionally, it is high-risk, high-stress, and has few, if any, safety nets. 🥅

As we’ve already mentioned, the adrenaline rush that makes day trading so fun is a double-edged sword as your best defense against taking huge losses is discipline—and discipline crumbles easily in the heat of the moment.

What are the Legal Requirements for Day Trading? 📚

The major day trading regulations concern the so-called pattern day trading. As per FINRA, a pattern day trader is anyone that makes more than four-day trades within 5 business days provided that those trades account for more than 6% of all trades of the margin account in question.

This definition, obviously, makes anyone who is day trading for a living a pattern day trader. This status makes it so that the trader has to have an account minimum of $25,000 in their account to start and continue trading.

Furthermore, it places a trading limit represented in day-trading buying power. This buying power is generally up to four times the difference between the account minimum and the actual money in the account at the close of the previous day.

A margin call is triggered if the trader exceeds their buying power and this usually lowers the number from it being the difference times four to difference times two until things are settled.

The reasoning behind these rules is that since day trading is inherently risky, both the trader and their broker need a safety cushion in case something goes awry.

Swing trading on the other hand has no such legal requirements, and the recommended $5,000 minimum recommendation is just that—a recommendation.

💡 Intimidated by the thought of day trading? Consider attending one of the top day trading courses, to learn how to day trade from an experienced professional.

Swing Trading Pros and Cons 📜

The first and obvious benefit of swing trading is that it is far more laid-back than day trading. It also requires a smaller initial investment and arguably carries less risk—instead of trying to profit off of often tiny and ephemeral price fluctuation, you are riding the momentum.

Topping of these benefits is the fact that swing trading can be as profitable as day trading without the daily stress, and without potentially sacrificing your eyes in front of computer screens. 👨‍💻

However, swing trading carries a major risk day trading is spared from—overnight price fluctuations. Furthermore, swing trading carries many other risks as well. While you stand to have fewer losing transactions, they tend to be bigger, and if you aim to avoid them, it also requires a great deal of financial literacy.

Forex, futures, and options are usually swing traded, and these types of securities are often considered risky—futures especially so. Finally, just like with day trading, all but the most atypical swing trades will trigger unfavorable short-term capital gains taxes.

Swing and Day Trading vs. Long-Term Investing 🕵️‍♂️

Since some experts have been warning investors to abandon short-term trading and focus on the decade ahead, and since the juxtaposition of short and long-term investing is only natural, let’s compare these two big modi operandi.

While day trading is especially quick to lure in new investors with the promise of excellent return, we must remember that long-term investing is also incredibly profitable with the S&P 500’s long-term average being around 108%.

Furthermore, with the U.S. government being unwilling to tax unrealized gains—mostly to the benefit of the very rich to be fair—holding at least some assets for an exceedingly long time can be more than a worthwhile endeavor. ⌚

Additionally, even holding stocks for more than a year can carry significant benefits, as, once again, long-term capital gains taxes are far more forgiving than short-term ones. Furthermore, while no form of investing is totally risk-free, long-term investing is generally safer.

This is especially true due to the existence of instantly-diversified investment vehicles like ETFs, mutual funds, and the like. On the other hand, some experts claim that overreliance on passive investing is terrible for the market as a whole, and very dynamic practices like day trading might ultimately be a truly winning strategy.

Swing and Day Trading vs. Position Trading 🔍

It would be nigh impossible to make a comparison between day and swing trading, and long-term investing without mentioning position trading. Position traders are often considered the polar opposite of day traders.

To clear things up a bit first, position traders and buy-and-hold investors aren’t quite the same as the former buy with an intention of profiting by selling their position. The latter tend to buy shares in order to build a portfolio for a very long-term goal like retirement.

Position traders try and identify bigger trends in the stock market. The basic idea is to find securities that are on the rise, buy them, and hold them until they reach the desired price—and sell them and take the profits.

The obvious advantage of position trading is that is less risky, often incurs only long-term taxes, and takes even less time and energy than swing trading. The drawbacks are that both day and swing trading tends to have a far greater earning potential and that finding truly winning long positions can be as challenging as identifying beneficial short-term fluctuations.

Conclusion 🏁

While there is really no clear winner between day and swing trading, some conclusions are, we feel, without a doubt. Short-term trading has become quite a fad during the covid-19 pandemic, and while there is nothing wrong with playing the stock market like this, it is always wrong to venture too much, and not arm yourself with knowledge.

These true truisms are likely to only play a larger role in the coming years with all additional volatility stemming from the heightened inflation, ever-increasing number of small investors on the market, and upcoming FED’s decisions in its attempts to stabilize the market.

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