The stock market is among the most unexplored industries that have great potential concerning making money. While stock trading is indeed popular, not many people are well-knowledgeable about this sector. Many traders themselves are unaware of what they are doing and what style works for them.
Whether you’re trying to research stock trading and the different trading styles, or if you’re trying to start your trading journey but don’t know what kind of trader you are, then you’re in the right place. In this article, we’ll share with you the two most common types of traders – a swing trader and a day trader. in addition to helping you figure out which kind of trader you are, we’ll also feature some methods or strategies that work best for you based on your specific style.
The Two Kinds of Traders
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In general, there are two kinds of traders – the day trader and the swing trader. The day trader is the more common type of trader which executes trades within the day. We often see these traders as those that perform diligent and extensive work during a particular trading day. Many traders prefer to be day traders because of their higher potential for profitability based on the strategy or trading method that is used. Unfortunately, while it offers a high-profit opportunity, it also posses a huge potential for losses if a day trader does not act quickly.
The other kind of trader is the swing trader which is more of a “comfortable” trading style because it doesn’t require much intensive work. It is focused on trading within a particular trading range – it can be days, weeks, and even months. Compared to a day trader, the swing trader doesn’t need much research or work to execute trades. In addition, the swing trader gives more emphasis to the fundamental analysis of a stock more than its technical analysis. Also, the swing trader may achieve lesser gains within a day however can gain more profits, in the long run, depending on the trading range that he or she is focused on.
So What’s The Difference Between A Swing Trader And A Day Trader?
Probably the best way to answer this question is to dissect the subject into a few factors or considerations. These considerations include time or period involved in trading, the amount of work involved, position-sizing, the potential profitability, and the particular strategy used by the specific style. By considering these factors, you’ll be able to weigh carefully your options. In addition, you’ll be able to determine your ideal style of trading if your situation or case matches the below-mentioned considerations.
Trading Range
One distinct difference between day trading and swing trading is the trading range or the period when the trades are executed.
A day trader as its name suggests focuses on trading events that happen within the day. With this, a trading range of 1-minute to 5-minute intervals would be ideal for any day trader. This would allow the trader to track even the smallest of changes in a chart and would allow the trader to locate accurate entry and exit points.
A swing trader on the other hand is focused on long-term trading which can occur within a few days, weeks, or even months. For a swing trader, the ideal trading range would be the daily trading range. In addition, a swing trader is more focused on the closing as well as opening prices, which is why swing traders often wait for the market to close before executing any decision.
Thus, if you’re someone who prefers to trade within a day and keep off from trading on other days, then day trading would be a good option for you. Day trading would also be ideal if you feel that a particular stock or asset would present huge opportunities on a particular day.
On the flip side, if you’re more focused on trading for the long term, or if you want to buy positions that you can leave for a couple of days or weeks and then sell at a higher price then swing trading would be ideal for you.
Level of Work
Just like any other means of making money, trading also involves some level of work. While many people prefer the kind of trading that involves minimal work, there’s no such thing. However, depending on your style of trading, there will also be a bit of difference with the work involved. Now when we say work involved, this involves data gathering and analysis such as researching about the company or stock, comparing historical price action, watching, and reading stock-related news.
For a day trader, the level of work involved would only be focused during the specific day of trading. This involves the consideration of real-time news, disclosures, and announcements from the company or stock within the given day. A day trader values the news and events that are taking place within the trading day much more than the past and future news and events.
A swing trader, on the other hand, looks to know the past, present, and future news, disclosures, announcements, and events of the company. While the daily data is also relevant to making trading decisions, a swing trader considers the daily data as a part of the whole formula or trade setting. However, the swing trader only takes the relevant or considerable data out of each day to be used as considering factor when making trading decisions.
When it comes to the level of work involved, a daily trader has so much work to do. However, this level of work for a day trader is only confined to the day of trading. Other than the day of trading, the day trader gets to relieve himself of any work – this means, there’s already little or no work involved after the trading day.
The swing trader on the other hand has much lesser work to do within a day since they only focus on the substantial or relevant news and happenings about their stock. Nonetheless, there is still much work involved since the swing trader needs to perform the same level of work each day until the target date. An example of this is when a swing trader buys positions on day 1 then waits every day until positions can be sold – every day, the swing trader will need to check back and gather data to know when the time is right to make a sell.
Position Sizing and Capital
Position sizing is referring to how many stock positions are secured in a particular portfolio. It is the ratio of the amount used to purchase stock over the total equity. On the other hand, capital refers to how much is invested in a particular stock. Not many traders know that these two factors work effectively together when utilized accordingly. While capital is a key element at the start of the trade, the right position sizing enables the trader to make the most out of the capital and potential gains. These elements work differently for both the day trader and swing trader.
A day trader is focused on a particular day of trading, thus he is aimed at making the most profits during that day only. With this in hand, a day trader invests most (if not all) of his capital to buy a single stock. As for position sizing, he secures 80% to 100% positions for every trade. By simply going all-in on a single trade, the day trader makes the most profits. However, this is also where it becomes riskier. If the invested amount is substantial, the potential gains also become higher however, the potential losses increase. With this, a day trader should always come up with a plan or strategy to exit the trade without losing much money whenever he comes across a potential loss.
On the other hand, a swing trader will have his or her capital invested in some stocks. in addition, each stock will have particular position sizes based on the gain potential of the stock. A swing trader is focused more on the journey of a particular stock rather than its price change during the day. With this, the swing trader will likely invest capital or secure positions on several stocks which has potential gains.
In short, when it comes to capital and position sizing, a day trader will likely have a smaller number of stocks in the portfolio that uses most of the capital – which also takes the most positions, says around 80%-100% of the total equity. This will allow the day trader to increase potential profits. On the other hand, a swing trader will have some stocks in the portfolio. Each of the stocks is divided into positions depending on its profit potential, and each of the stocks has its distinct range to be traded and a target price.
Rate of Profit
Depending on your style of trading, you can either have fast profits or slow but sure profits. In this regard, it is also important to note that faster profits pose higher risks compared to slow consistent profits.
As we’ve known from the previous considerations for each trading style, a day trader is likely to go all-in on a single trade which enables a high rate of potential gains. Since a considerable amount of investment is made for a single stock, the potential profits also increase. However, it is important to note that day trading hinges on small price movements – say around 7%, 10%, or maybe more but not more than the ceiling price and floor price of the day. Depending on the capital, the rate of profit for small price movements can be huge.
On the other hand, a swing trader gets smaller portions of profits on a trading day – in a consistent manner. Swing traders as mentioned earlier use smaller position sizes per stock thus they make much lesser potential profits during a day. However, we also know that a swing trader is not only focused on the trade that happens within the day, they focus on a particular trading range that can last for days, weeks, or even months. While the daily profits can be a bit small, the long-term profits can prove to be much greater out of swing trading.
Trading Strategies
A trading strategy is something that a trader should always equip himself with. Without a trading strategy, a trader is only bound to incur losses. With this in mind, a day trader and a swing trader, in general, make use of a distinct strategy.
For the case of a day trader, he needs a strategy that would allow him to make quick buy and sell actions within a limited time frame. In addition, the day trader should be able to make quick decisions without having to go through a lot of research and data gathering, considering that price moves very fast during small time intervals or ranges. Thus, the ideal trading strategy for a day trader would be the “Bounce Play” strategy wherein he waits for the price to bounce at a certain level and quickly makes a sell or buy. In addition to a bounce play strategy, the day trader can also adopt other strategies that focus on candlestick patterns. Candlestick patterns are effective trading tools that enable any trader to make good predictions regarding the next movement of the price.
As for the swing trader, he prioritizes the fundamental analysis of stock much more than its technical analysis. Recent and future events, disclosures, and news about the stock or company are important catalysts toward price predictions for a swing trader. Technical data such as price movement or candlestick patterns only come as secondary factors toward making a trading decision.
Now, these are only the most common strategies used by both trading styles. There are still many other strategies and trading methods that can be used out there. In addition, some methods and procedures from each strategy can also be adapted for both trading styles. What’s important is that the trader has the means to make the strategy or method useful. When looking for an ideal strategy, choose one that is both comfortable or convenient to use and easy to modify to match your trading preferences.
Our Final Thoughts
As a conclusion, day trading would be ideal for you if:
- You want to trade at a rapid pace – minute trading range
- You are disciplined and can stick to a single strategy when trading
- You can make quick exits when a trade is not favorable
- You want to make huge and quick profits but is also open to the potential of huge losses
- You have a good amount of capital and can invest a huge portion in just a single stock
- You like the handle adrenaline-rush in a trading day
- You can devote a whole day to your trading
On the other hand, swing trading would be ideal for you if:
- You are patient with your trades – you can wait days, weeks, and even months before taking profit
- You can quickly adapt to other strategies when a particular trading strategy is not working
- You want to make sure profits – even in small portions per day
- You can endure losses along the way on your trade
- You are willing to invest few positions per stock
- You want the idea of buying a stock and leaving it for a few days before taking a profit
- You are busy with other engagements such as a day job and have less time to monitor or study charts
These factors and elements can help you greatly in determining which trading style is best for you. Among the factors mentioned, it is essential to devote most of your time to improve your strategy or trading method. The best way to find the ideal strategy or trading method that works for you is to test it out on actual trades. With a virtual account at eToro, you’ll be able to gauge your trading capability and you will be able to identify the ideal strategy that works for you – without spending actual money.
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