In this article, we provide a cursory overview of the various benefits and drawbacks of swing and day trading. This list is by no means comprehensive, but we have also provided a lexicon, or dictionary, of terms, which ought to provide readers with some areas of study to explore as they weigh their decision of which camp to join. Much of the terminology and claims that we make springboard from the notion of heuristics, or simple rules-based processes, that are inherent to trading, regardless of which you decide to explore.
Unlike passive investors, individuals who boast trader status lump themselves in one of two categories: swing, or day. While longer term investors may be sitting in a position for years or decades, these trading strategies attempt to leverage short-term price movements.
As its name implies, day traders make dozens of buys and sells in a single day, using technical analysis, news catalysts, as well as charting (including algorithmic models, semi-automated systems, etc.). Day traders deal with many different asset classes, whether they are metals, commodities, currencies, or regular stocks.
On the other hand, swing trades, while dealing with the same asset classes, and often using the same disciplines of technical analysis as day trading, positions may be held for several days or weeks. Swing traders normally have full-time jobs and do not aim to earn a living wage solely off trading.
On tighter time dimensions, the heuristics used by passive investors often begin to break down due to the effects of high frequency trading, unpredictable volume and price movement due to institutional money and hedge funds (e.g. you become victim to Random Walk Theory and the Efficient Market Hypothesis), as well as the high volatility distilled by these movers and various other agents. While many successful day traders understand how to leverage these effects to their advantage, a majority will lose to market professionals in day trading contexts.
As you move to broader time-frames (the daily, monthly, weekly, and so on), these effects largely begin to diminish, and hence, overall structural features become more apparent. These include modes of analysis such as Fibonacci, symmetry, as well as fundamental data. An example of this latter feature might go something like: Does a company or chart hold its gains over time?
With a rigorous rules-based trading system, and high self-discipline, a small percentage of day traders are able to make “supernova” profits in relatively short periods of time. However, the downside of a day trade also carries measurable risk with it if you do not manage risk correctly.
On the other hand, leaving a position open for days or weeks on end for an extended swing trade can oftentimes eclipse the profits a day trader can make, even if they are scalping a security multiple times. As mentioned in the previous subsection, risk also becomes easier to manage for several reasons. That being said, there are phenomena such as stop-losses being “taken out”, as well as significant draw-downs, that amateur investors/traders with weak hands will inevitably suffer through.
Day trading is highly stressful, and anyone who wishes to get involved should take account of their emotional quotient, multitasking and mathematical abilities, lateral thinking, as well as the ongoing costs of sustaining a full-time commitment of day trading. If you eventually do begin to profit, expect that your first year will be full of losses, as well as a process of discovery as you deal with trading queues, brokers, margin requirements, trading platforms, and an entire checklist of other like points.
On the other hand, swing traders normally have a regular source of income, and can mitigate losses. Overheads are much lower, and most swing traders just require or use one computer. These two points together already provide a psychological “trump” that day traders face in their routines, especially if they are using borrowed margin.
Risk aside, swing trading is far less demanding, and is suited for investors with full-time jobs. On the other hand, day trading is a full-time job in itself, and requires your complete attention. While each individual trader will bring their own psychological properties and nuances to their decision in which style to employ, the rules used on higher time dimensions (as in swing trading) apply to day trading, too, albeit at higher frequencies and in shorter positions.
Hence, while the jury is still out on which style is “better”, stronger indicators of a successful day or swing trader rely on psychology, risk management and tolerance, personality, and background knowledge (Mathematics/Statistics, Economics, News/Politics, etc.).
Weak Hands: Using its secondary definition, this phenomena refers to retail [pattern] traders that employ the heuristic: “Exit a position when a pattern is broken.” Institutional and professional investors often leverage the tactics retail traders use with this heuristic (e.g. stops underneath a double bottom) to enter position at a bargain as an equity corrects itself.
Efficient Markets: Hypothesis taken from Finance/Economics Theory that the prices of an asset reflect all of the information available. This implies that since all stocks trade at their fair value, it is impossible for traders to “beat the market”, since investors will never be able to buy or sell at apparently undervalued or inflated prices.
Random Walk Theory: In Financial Theory, this theory states that since stock prices resemble a “random walk”, that future prices cannot be predicted.
Random Walk: Mathematical or statistical object which refers to a stochastic (random) process. Examples of such processes include weather patterns, stock charts, audio/digital signals.