Swing Trading vs. Day Trading vs. Trend Trading

If you want to profit from the stock market and become a trader, it’s essential to know what type of trader you are. This comparison involves more than determining which trading style is the most profitable. Moreover, learning the differences between day trading vs. swing trading vs. trend trading will help you discern which trading technique best suits your personality and situation.

Swing Trading vs. Day Trading vs. Trend Trading: Basics

Swing trading and day trading are primarily short-term strategies. On the other hand, trend trading is used by all types of traders. At times, their techniques may overlap.

What is day trading?

Day trading is when you buy and sell securities on the same trading day. In the United States, a single trading day for the U.S. equities markets is officially from 9:30 am EST (Eastern Standard Time) to 4:00 pm EST every Monday through Friday.

A day trader does not have a minimum or a maximum number of trades per day. Instead, their trading strategy and the market dictate frequency. When appropriate, a day trader may purchase an asset and hold onto it for only a few seconds but no more than a day. The goal is to profit on small, short-term price fluctuations. Day traders will cash out their positions by the end of the same trading day.

What is swing trading?

Swing trading is another short-term trading technique. The amount of time a swing trader holds onto an asset falls between a day trader and a trend trader. One significant difference between a swing trading strategy versus a day trading stratgey is that swing traders will hold onto a tradeable asset overnight and even for a weekend, which significantly increases the risk of substantial losses.

A swing trader hopes to profit from an asset’s “swing” or significant price change. This upswing or downswing can occur between one day or may take several weeks. During this time, as with any stock, the price will fluctuate, and the trader may incur losses. Ultimately, by the end of the swing, the swing trader will capitalize on the larger price movement, as compared to a day trader, and lock in some gains.

What is trend trading?

Trend trading, which is also known as position trading, is very similar to swing trading because they both aim to capture gains by capitalizing on an asset’s momentum in a particular direction. Naturally, when the price movement leans towards one direction, whether higher or lower, it is called a trend.

In general, trend traders will execute fewer positions but hold them for a longer time frame as compared to swing traders. This time period can be anywhere from 1 week to 6 months. Because of the length of the hold, trend traders typically choose smaller positions, which equates to less risk and likely less profit.

Swing Trading vs. Day Trading vs. Trend Trading: Strategy

Each trading style utilizes a slightly different trading strategy and financial analysis. Day traders rely heavily on technical analysis while trend traders rely heavily on fundamental analysis. Swing traders sit comfortably in the middle but lean more towards technical analysis, due to its short-term nature.

Day Trading: Technical Analysis

Day trading is based on technical analysis and sophisticated chart systems. Technical analysis is a method of analyzing securities based solely on the data generated by the market.

Day traders spend a great deal of time in front of a computer screen reading price charts every minute all day long. These charts help them to understand the asset’s price movements, volume, moment, structure, and sentiment. These trading signals help to evaluate a security’s strength and weakness and reveal whether the investor should buy a stock or not.

Swing Trading: Technical Analysis with Some Fundamental Analysis

Most swing traders use technical analysis to determine where they enter and exit a trade. However, unlike day trading, swing trading does not require constant chart monitoring. Most swing traders can check the daily price charts once when the markets open and once when the markets close to monitor their open positions. Although, some traders may choose hourly time frame charts if they prefer to be more active.

Swing traders also use a combination of technical analysis and fundamental analysis. Fundamental analysis attempts to evaluate a security’s intrinsic value by examining relevant economic and financial factors concerning the company, the domestic and global environment, etc.

Fundamental analysis is critical for swing traders that hold an asset overnight and through the weekend. External factors, such as the news, press releases, and even social media can impact an asset’s price.

Trend Trading: Fundamental Analysis with Some Technical Analysis

Trend traders try to see the big picture. They rely heavily on fundamental analysis, which consists of macroeconomic and microeconomic factors. Macroeconomic factors may include economy and sector conditions while microeconomic factors may consist of a company’s earnings and financial metrics.

Therefore, while swing traders may consider microeconomic factors that focus on relevant company news and decisions, they typically ignore macroeconomic influences. Trend traders take into account broad economic, political, and environmental issues that may affect their open positions and risk management strategy.

Swing Trading vs. Day Trading vs. Trend Trading: Margin Requirements

Margin is money that a trader borrows from a brokerage firm to increase their leverage to purchase an investment. Essentially, it is the difference between the total value of securities in an investor’s portfolio and the loan amount. Most traders are subject to the same minimum requirements.

A margin account is an account with a brokerage firm where the investor funds the account first. Your brokerage company will increase the equity in your margin account to increase your leverage and buying power.

Margin Account Minimum Equity Requirement

Regulations set forth by the New York Stock Exchange (NYSE), FINRA, and the Federal Reserve Board require an initial margin minimum equity of $2,000 in cash or securities or equivalent to 100% of the purchase price.

Additionally, the FINRA has set forth special day-trading margin requirements, also known as pattern day trader regulations. Pattern day traders are required to maintain a minimum amount of equity of $25,000 at all times. You are a pattern day trader if you are a stock trading customer that day trades at least four times within five business days or if your brokerage firm designates you as one.

Initial Margin Minimum Requirement

According to the Federal Reserve Board, Regulation T dictates that up to 50% of the purchase price of a security or basket of securities can be purchased on margin.

Margin Maintenance Requirement

The NYSE and FINRA maintain a 25% minimum maintenance margin requirement. According to FINRA Rule 4210, in general, an investor’s account cannot fall below 25% of the current market value of the securities in his account, which is referred to as a margin call.

While these agencies and organizations may have minimum requirements, your brokerage firm may have its own set of guidelines. Their conditions may be more restrictive and exceed the aforementioned minimum equity, initial margin, and margin maintenance requirements.

Swing Trading vs. Day Trading vs. Trend Trading: Pros and Cons

Each trading style has pros and cons. Learn more about the advantages and disadvantages of each.

Swing Trading: Pros

  • Less active trading, which does not require as much time in front of a computer screen
  • Can be done in addition to another job
  • Fewer trades mean fewer commissions and fees
  • Fewer trades also imply that there is less risk
  • Larger positions can be more profitable than day trading’s smaller positions
  • Faster potential profit and return than trend trading

Swing Trading: Cons

  • Holding an open position overnight comes with more risk
  • Preparing and analyzing markets can be time-consuming
  • Requires more patience than day trading

Day Trading: Pros

  • Smaller positions mean less risk per single trade
  • More trades mean a greater chance of overall profit
  • Positions are closed at the end of the day, which means day traders don’t need to worry about overnight events and news affecting their trades
  • More potential for consistent profit and faster return

Day Trading: Cons

  • Less risk per trade means less reward per trade
  • More trades mean more commissions and fees
  • More small trades mean cumulatively more risk
  • Time consuming because it requires active trading in front of a computer screen
  • Multiple trades have the potential to lose a lot of money in a short period of time
  • Can be extremely stressful

Trend Trading: Pros

  • Losses are more easily absorbed in market movement
  • Easier to predict price movements because of overall trends
  • Less time-consuming than day trading

Trend Trading: Cons

  • More long-term investments mean less consistent profit
  • More risk because of open overnight positions
  • Ties up money for an extended period of time
  • Requires the most patience and self-control, which can be psychologically taxing if your investments start trending backward from your goal

Conclusion

The first step to trading is identifying your style and strategy that you feel comfortable with. Then, you can take steps to figure out how to responsibly get involved with the stock market and practice trading strategies that work. Researching the stock market and keeping up with the news is essential for all types of traders.

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