Swing Trading vs. Day Trading: Here’s How They Are Different

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Day trading and swing trading are exciting ways to play the market. Those with an expert’s touch can not only feel the ebb and flow of the market but also make significant profits from trading it. But it’s important to know that there are important differences between day and swing trading — and that both can carry substantial risks, especially when compared with long-term investing.

Here’s a look at what day and swing trading are, how they are different, and why long-term investing is still the best option for the average investor.

Day Trading

Day trading, as the name suggests, involves making multiple trades over the course of a single day. Active day traders may make tens or even hundreds or trades in a single day, in one security or a number of different ones. True day traders never carry a position overnight, always closing the books on their portfolios before the trading day ends.

Pros

• Exciting, can be fulfilling to “beat” the market and professional experts
• Can generate significant short-term profits
• Reduces risk of exogenous events by not holding positions overnight.

Cons

• Most day traders, according to the SEC, lose money, sometimes a significant amount.
• Extremely stressful
• Often involves leveraged trading on margin, which could lead to losing more than you have.
• Day traders typically have greater account restrictions.

Day Trading Account Requirements and Restrictions

If you trade too frequently, you might be labeled a pattern day trader by industry regulator FINRA. The designation of “pattern day trader” applies if you execute four or more day trades within five business days and those trades amount to more than 6% of your total trades over that period. In other words, if you start day trading with any regularity, you’re likely to be labeled a pattern day trader.

Once you’re considered a pattern day trader, additional restrictions will apply to your account.

Specifically, you’ll have to maintain a minimum equity of $25,000 any day that you trade. You’ll also be prevented from trading in excess of your “day-trading buying power,” which usually amounts to four times your margin maintenance excess. If you’re not familiar with margin trading and what “maintenance excess” is, you shouldn’t be day trading to begin with.

Be sure to educate yourself on leverage, margin and day trading restrictions before you start.

Swing Trading

Swing trading is somewhat like day trading, but over a slightly extended time period. Swing traders attempt to ride the momentum in an individual stock, a particular industry or the overall stock market over a period of a few days or weeks, rather than a single day.

Pros

• Doesn’t require as much attention or monitoring, leading to less stress
• Can generate larger profits over time if a trend is in place
• Can avoid the account restrictions and capital requirements of a day trading account.

Cons

• Ties up investment capital for a longer period of time
• Losses can accumulate over time if you wait for a losing trend to reverse
• Doesn’t carry the adrenalin rush that many day traders crave.

Day and Swing Trading vs. Long-Term Investing

To be a successful day or swing trader takes discipline, knowledge, skill and even a bit of luck. While it’s certainly more exciting to deftly move in and out of stocks than to put money into a mutual fund or ETF every month, most investors will end up better off in the long run by taking the “boring” path.

In fact, the U.S. Securities & Exchange Commission has gone so far as to make this bold statement to warn investors: “Day traders typically suffer severe financial losses in their first months of trading, and many never graduate to profit-making status.” That’s about as clear an indication as you can get that day trading isn’t for everyone — or even for the majority of people.

While long-term investing can seem “boring,” it actually greatly reduces your risk. Even though the stock market can be volatile on a day-to-day basis, over the long run, the ups and downs smooth out and the market becomes much less risky.

Something many investors don’t know is that the S&P 500 has never lost money over any 20-year rolling period, which is an incredible statistic when you think about it. And over 30-year rolling periods, the market’s worst annual average return was an astonishing 7.8%. What that means is that the longer you keep your money in the market, your risk of a long-term loss essentially vanishes.

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