Day Trading vs Swing Trading -- What's the Difference?

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If you're looking to invest in the stock market and want to be active on a regular basis, then you are likely deciding whether to pursue swing trading or day trading.

Both options give you a lot more trading action than you'd get from being a buy-and-hold type of investor. But there are critical differences between the two.

Swing trading involves holding a stock or options position for multiple days (sometimes weeks or months). Day trading involves holding a stock or options position for less than one day (sometimes minutes or hours).

There are many more differences to consider before deciding which suits you.

Risk Involved with Swing Trading vs. Day Trading

One of the benefits of day trading is you don't hold positions overnight. You are out of all your positions by the end of each trading day.

In other words, if you buy a stock, you'll typically sell it the same day so that you're "flat" overnight and have no trades open. It means there is no risk of your account value going down overnight.

With swing trading, on the other hand, by definition, you will be holding positions overnight. That means you are exposed to the risk of price movement of your positions overnight.

This overnight risk is called gap risk. In some cases, holding a stock or options position overnight could have led to substantial losses.

For example, say you buy options for Apple. After the market closes, imagine that Apple reports earnings and the results are negative.

That could cause the price of Apple stock to drop substantially overnight, and by the time the market opens the next day, your Apple position could have lost a lot of value.

With day trading, you don't have that risk because you don't own positions overnight.

Although you have gap risk with swing trading, sometimes that risk pays off. We've done research that suggests that over the last 20 years, stock prices have gone up overnight by more than they've gone down.

So there might be a justified reason to embrace the gap risk involved with swing trading. But it's a genuine risk, and each investor has to decide what level of risk they feel comfortable taking.

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Time Required for Day Trading vs. Swing Trading

Swing trading typically involves a lot less time than day trading.

For one thing, swing trading typically has a lower volume of trades. Since swing trades last longer than day trades, it limits the number of swing trades you can take relative to day trades.

That means there could be fewer overall trades with swing trading and less trade administration time.

Aside from that, many forms of day trading involve carefully watching the computer screen for a perfect trade setup. Many day trading courses talk about how patiently waiting while watching the screen can be crucial to success.

Scalping is an example of a type of day trading where a lot of screen time is needed. Scalpers are getting in and out of trades constantly. By necessity, they need to glue themselves to their screens each day.

Compare that to swing trading. Each swing trader will spend time researching stock trade opportunities, but swing trading does not require a person to sit in front of the computer screen all day.

You can even minimize the time needed for swing trading research.

You can sign up for a swing trade alert service. The service will do the research and notify you when a trade opportunity comes up. All you have to do is decide whether to administer the trade.

Therefore, when it comes to the time required to make trades, swing trading is night and day compared to day trading.

Another note worth mentioning: day trading typically requires particular types of stock trading apps, whereas swing trading can use just about any trading app you want.

Swing Trading vs. Day Trading as a Profession

Since day trading typically requires so much time in front of a screen, it might require a nearly full-time commitment to succeed for most people.

But does it make sense to do day trading as a profession? The answer is that it comes with a lot of risks.

Imagine if your primary source of income depends on how profitable you are with your trading each day. That puts immense pressure on you to perform daily, which could lead to some emotional strain.

Aside from the roller coaster of feelings, if you have a bad week or a bad month, it could mean you don't eat. That's a terrifying thought for many. It's the polar opposite of a typical salaried job where you can count on your paycheck week in and week out.

So until or unless you become highly skilled and successful at day trading, you might face extreme emotions and financial risk if you rely solely on day trading as your source of income. And yet it might require a full-time commitment to become proficient at it in the first place.

It's a risky proposition and one that many people do not successfully achieve.

Could swing trading serve as a profession? Since it requires much less screen time than day trading, it may not need to be.

People can do swing trading on the side of their full-time jobs. Many people take on swing trading to supplement the base income from their full-time jobs.

That makes it less risky than day trading because you can maintain a full-time job while swing trading.

Could someone still choose to take on swing trading as a full-time job? Yes, they hypothetically could. But they'd face the same risks described above.

Your week-to-week paycheck may be unreliable. You could even lose money by swing trading. What would you do if you're relying on swing trading as your source of income and you lose money over a week or a month? Some people indeed make it their primary job to swing trade, and those people are living the good life considering that swing trading doesn't require you to sit in front of a screen all day.

Profitability of Day Trading vs. Swing Trading

One thing that distinguishes these two types of active investing is that research suggests swing trading might have better odds of profitability than day trading.

We performed this research by taking a large variety of trading strategies and backtesting them to see how they may have performed historically.

In other words, we take a rules-based strategy and apply those rules over and over against a stock's historical price. That tells us whether any given trading strategy may have been historically successful.

When testing swing trading strategies, we found a number of strategies that reflected profitable backtest results.

When testing day trading strategies, we found almost none.

We can draw a few possible conclusions from that research:

• It might be easier to profit by swing trading than by day trading.

• If you are day trading using an algorithmic, rules-based approach like the ones we tested, you may not have a profitable edge.

• Success with day trading may rely more on your intuition or ability to identify other factors we didn't test in our research.

That is another indicator of how tough it might be to become successful at day trading.

Pattern Day Trader Rules

There's another important rule to be aware of if you're considering day trading.

The Pattern Day Trader Rule says that unless you have at least $25,000 in your trading account, you can't make more than three intraday trades in a week. Intraday trades are trades that you open and close on the same trading day.

In other words, if your account is smaller than $25,000, you can only make three day trades per week. If you do more than that, brokerages will limit your account privileges.

That is another challenge of becoming successful at day trading.

It's similar to the chicken and egg question for many: which comes first? How can you build that amount of money in your trading account if you can't day trade? And how can you get good at day trading if you need more money to meet the rule requirements?

Ultimately, it means you'll have to take a risk if you want to be an active day trader. You'll have to find a way to get $25,000 that likely doesn't involve day trading, and then you'll have to put that money at risk while you learn to day trade.

It's a risky proposition. It offers another example of why it's so hard to succeed at day trading.

Conclusion

Swing trading and day trading are both forms of active investing in the stock market, and they involve holding stock and options positions for different amounts of time.

Swing trading requires less time and has more evidence of potential profitability, making it a popular choice among people who have full-time jobs and are looking for an extra source of income.

Day trading requires more time and likely risk, but those who are successful get to spend every day playing in the stock market and living the dream.