Day trading vs swing trading – what is a better choice in Forex?

Trading strategies differ in many aspects – scale, time frame, risk to reward ratios, trading sessions and preferred trading instruments are just to name a few. Day trading in forex involves rapid decision making and trend analysis. Swing trading requires thorough research of economic and political factors that affect the forex market. While the purpose of each trading style is the same – to beat the markets and make consistent profits, there are significant differences between the two.

The importance and deployment of technical analysis tools in day trading is more focused on trends and past performance, whereas swing trading is geared towards anticipating market movements prior to and after significant economic developments and industry data.

Day traders closely follow the market and try to identify trends as they are forming, while swing traders are focused on the big picture and the effects of complex international trade relations and internal policies that affect exchange rates and try to make the right moves as they happen.

If you are curious about the core differences between the two trading principles and would like to examine their respective advantages and drawbacks, this guide is for you.

What is day trading and what advantages does it have in forex?

To understand whether daytrading has an appeal, traders should learn about the core principles of day trading and its pros and cons.

Day trading definition

Day trading refers to the action of placing trading orders throughout the day and closing out all of the existing positions before the next trading day starts. Day trading involves much technical analysis and is a fast-paced trading style. Also referred to as intra-day trading, this approach also requires much discipline and a concrete strategy to remain consistently profitable.

Day trading advantages and disadvantages

As with any trading style, day trading has its strengths and drawbacks that should not be overlooked by traders seeking a successful experience on the market.

Advantages:

• Speed – Day trading involves quick decision making and execution, which is typically not problematic due to the sheer amount of liquidity available on the forex market
• No overnight risk – Day traders choose not to leave open positions overnight, which is convenient considering markets are open 24/5 and volatility could spike when the positions are left unattended
• Identifiable patterns – Certain patterns signalling changing trends can be easily identified on a chart due to their shapes, which can be useful indicators for traders
• Swap-free – Apart from the inherent risks associated with holding positions overnight, a swap fee is also charged for each night, which is an additional expense that day traders do not have to bear
• Leverage – While not exclusive to day trading in any stretch, leverage can boost buying power and make day trading far more profitable with limited initial capital

Disadvantages:

• Reliance on technical indicators – While certain indicators may be easy to identify, they can also be misleading and unreliable at times, which can prove costly for traders
• Volatility – Forex markets are notoriously volatile and this is especially pronounced in day trading, which increases the risk of unprofitable trades
• Stress – The high-speed nature of day trading also leads to stress once unsuccessful trades pile up and mental fortitude can be an integral part of successful day trading
• Low reaction time – Traders do not have much space for error or analysis in day trading, which can lead to mistimed trades and missed opportunities
• Patterns – trading patterns do not work well in smaller than 1 hour time frame due to market noise

What to expect from day trading

While no trading method can guarantee solid returns, the general rule of thumb in day trading is to maintain a 2:1 or higher risk-reward ratio, which means that for every unsuccessful trade that loses 1% of account value, a successful one should bring 2% in profit.

If the risk to reward ratio is 1 to 1, the win rate needs to be greater than losses in order to make profits overtime. Most day traders blow up their accounts as they fail to manage their emotions and tend to revenge trade after losses. Day traders trade more frequently than swing traders and experience more losses. If you are someone that cannot take losses, maybe more calculated decisions and swing trading is for you. Day traders are scalpers, high frequency traders and position traders.

What is swing trading and how does it work?

Swing trading differs from day trading in terms of duration and analysis. Swing traders usually hold their positions for a few nights, or at least overnight, before exiting. Swing traders use a combination of fundamental and technical analysis to anticipate market trends and take advantage of opportunities. To understand whether swing trading is right for them, traders should consider the concepts behind swing trading and its pros and cons.

Swing trading definition

Swing traders hold their positions overnight and might even hold them for a week or two if market conditions are favorable. A combination of fundamental and technical analysis helps traders make more calculated decisions and profit from higher win rates.

Swing trading advantages and disadvantages

The pros and cons of swing trading revolve around the duration of time between trades and the fees associated with holding positions for longer periods of time.

Advantages:

• Time – Swing trading involves holding positions for longer periods, which reduces the need for constant monitoring and fast-paced decision making, which leads to a less stressful trading experience
• Cost-efficiency on spreads – Due to the low frequency of swing trading, spreads charged on these trades do not accumulate, making them cost-effective
• Higher win rate – Swing traders take less trades than day traders. They make more calculated position trades. Consequently, the win rate is larger.

Day trading vs swing trading – key differences

• Swing trading requires less direct oversight, while day trading needs to be actively managed
• Day traders execute multiple trades within a trading day. Swing traders take longer than a day to finalize their trades.
• Swing trading takes less technical expertise than day trading, which requires significant technical skills and pattern recognition
• Profit and loss margins in day trading are more limited than in swing trading
• Day trading requires high speed internet and speedy decision making, while swing trading is less technically demanding
• Day trading is fast-paced and can be more stressful than swing trading

Popular day trading strategies

Many day trading strategies have emerged over the years, taking multiple different indicators into consideration to provide consistent returns.

Scalping

Scalping is a day trading strategy that takes advantage of short-term trends and trend reversals. Profit margins in scalping can be rather limited, therefore, traders make these trades dozens of times per day. The reasoning behind scalping is to slowly build up funds by making frequent, less profitable trades. Scalping does not always require the identification of a major trend and involves trading the highs and lows of each promising candlestick on a chart. In scalping reversal charts and candlestick patterns are highly voluable.

Trend trading

Trend trading is not exclusive to day trading. However, it is vastly used by day traders. It’s recommended for novice traders to follow trends as going against established trends is dangerous and requires skills and experience.

When using trendlines to find entries, you can enter the uptrends long when the price touches the support. And short sell in bear markets when the price touches the resistance. In addition there are various trend trading indicators, mainly moving averages. Moreover, you can use continuation charts and candlestick patterns to trade trends as well.

Mean reversion

Mean reversion is a strategy that implies that prices eventually return to their historical mean. Mean reversion seeks to identify assets that have strayed from their historical performance and signals to open positions that are directed towards the historical mean.

Main takeaways from day trading vs swing trading

• Day trading is a trading style which involves placing and executing multiple trades per day without holding positions overnight
• Swing traders anticipate trends as they form and hold positions for longer periods of time
• Day traders base their decisions on technical analysis, while swing traders use a combination of technical and fundamental analyses
• Both day and swing traders have the option to use leveraged positions to boost buying power
• Swing trading requires more planning and therefore is more accurate. On the downside, there are less trading opportunities than in intraday trading.

FAQs on day trading vs swing trading

What is swing trading in forex?

Swing trading in forex involves buying and selling currency pairs over longer periods of time – typically from a couple of days to weeks. Swing traders use technical and fundamental analyses to identify trends as they form on the market.

Is day trading better than swing trading?

Day trading involves rapid decision making and multiple trades a day, which requires some technical expertise and can be stressful. Swing traders only place a handful of trades that do not require constant oversight and could lead to higher absolute returns. However, it’s difficult to say which one is better. Ultimately it depends on the trader.

Is day trading riskier than swing trading?

Day trading depends mostly on technical analysis. Day traders place more orders and these orders are riskier than swing trading orders. However, this doesn’t mean that any of the two trading methods is more profitable than the other. Swing traders take more calculated trades, however, their trading frequency is much smaller.

How is swing trading different from day trading?

The time frame for swing trading is wider than day trading and requires fundamental analysis of trends and economic news, while day trading is fast-paced and requires significant technical expertise to accurately identify possible price movements.