Swing trading vs day trading: what you need to know

1. What is swing trading and how does it work?
2. What is day trading and how does it work?
3. Swing trading vs day trading: what are the differences?
4. Swing trading vs day trading in forex
5. Swing trading vs day trading summed up

What is swing trading and how does it work?

Swing trading is a market strategy that involves holding positions over a number of days or weeks. This trading style is less concerned with a market’s second-to-second price movements, but instead looks to capture a portion of a larger overall trend.

Swing traders often use CFDs to gain exposure to the markets. Both are derivative products, which means they can be used to speculate on rising and falling asset prices. You’d open a position to ‘buy’ (go long) if you think the market’s price will increase, or you’d open a position to ‘sell’ (go short) if you think its price will decline. When trading derivatives, you only need a deposit – called margin – to open your position. Trading on margin can magnify your profits, but it can also amplify your losses if the market moves against you.

Swing traders can use these products to speculate on markets that are bullish or bearish – providing greater scope to realise a profit within an overall trend.

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When using leverage to open a position, you’re effectively borrowing the money required outside of your initial deposit. If you hold a position overnight, this borrowed amount incurs a daily interest rate fee, known as overnight funding.

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What is day trading and how does it work?

Day trading is a style that’s often used to gain exposure to short-term price movements in an underlying market. People who favour day trading will open and close multiple positions during a single trading session, usually in reaction to daily news stories or market-moving events.

Day traders frequently prefer higher market volatility because this means a market might experience more price movements in a shorter space of time, which could present greater opportunity to profit. Usually, markets are most volatile during their open and close times.

Day traders don’t leave their positions open overnight, so they don't pay overnight funding charges. But, they will need to pay close attention to the markets and should take steps to manage their exposure to risk in case the market moves against them.

As with swing trading, you can use CFDs when you’re day trading. These derivatives offer day traders the opportunity to profit in rising and falling markets – which can help to maximise your exposure to opportunity in a single trading session.

You can day trade on any market, but the most common ones are forex, shares and indices. Forex, in particular, is popular because of the wide variety of different forex pairs and the market’s inherently high liquidity – which makes it easier to open and close your positions quickly.

Day trading in forex means you’re likely going to pay multiple spread costs throughout the day. Because of this, it’s important to be aware of pips. In forex trading, a pip of movement is a change in price at the fourth decimal place. So, if the price quoted for a forex pair increases from 1.2500 to 1.2501, there has been one pip of movement. Forex pips are used to calculate the bid-ask spread for a specific pair and express profit and loss.

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Swing trading vs day trading: what are the differences?

Here are the key differences between swing trading and day trading:

Swing trading vs day trading in forex

Forex is a popular market for day traders and swing traders due to its liquidity and volatility, which both present many opportunities for trading. That said, high market volatility can cause prices to change rapidly, which could result in losses if you haven’t taken steps to manage your risk.

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An important consideration before you start swing trading or day trading is carrying out your own analysis. It’s usually most effective to use a combination of both technical analysis and fundamental analysis as a part of your swing trading or day trading strategy.

Technical analysis involves looking at market statistics and historical price charts overlaid with technical indicators or oscillators. The aim of technical analysis is to identify recognisable patterns that indicate the right time to enter and exit the market. Examples of technical indicators include moving averages, the relative strength index (RSI) and the average directional index (ADX).

In forex, fundamental analysis looks at the economic conditions within relevant countries, such as inflation rates, gross domestic product (GDP), and employment levels. Each of these metrics could affect the strength of one currency against the other in a specific forex pair. Forex traders also often assess other figures released by central banks to gain insight into the state of a country’s economy, such as interest rates, foreign exchange reserves and the liquidity of the domestic currency.

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Swing trading vs day trading summed up

• A swing trading style involves holding positions for days or weeks at a time
• A day trading style involves holding positions for minutes or hours, but never overnight
• Forex is a popular market with day traders and swing traders due to its inherently high liquidity and volatility
• Swing and day traders can use leveraged products like CFDs to trade forex
• Swing traders and day traders should use both technical and fundamental analysis when trading forex