Day Trading vs. Swing Trading vs. Position Trading
Simple explanation of each:
Also known as 'Intraday', positions are usually entered & exited within the same trading day. Obviously scalping fits into this category. Traders in general are interested in quicker,smaller amounts and making multiple trades per day.
- Smaller take profit target = Smaller risk per trade.
- Because of the amount of trades being placed, compounding has a greater effect on your overall profits.
- You can make money faster.
- Makes you 'Feel Good'. Can be a rush!.
- Allows you to always be actively participating in the market .
- Because of the last two, traders can exhibit addictive behaviour (gambling).
- Because most positions are closed out at the end of the day, able to take advantage of interest earned in their account.
- Risk control - positions are closed out overnight so unexpected market changes will not affect your bottom line.
- Spread has a larger effect on your overall profits.
- You can lose money faster.
- Very difficult to learn - by some estimates less than 1% of traders become successful.
- Time consuming - very difficult to trade properly if you have a full-time job.
- Fast pace & necessary concentration can make day trading very stressful.
- Extremely Risky! Traders can lose a substantial amount of money in a very short period of time.
- Discipline, proper money management, risk/reward and a profitable system are a lot more important when day trading. Even a small mistake can result in a huge loss.
- Can be harder to predict the market.
Swing trading is typically a short to intermediate term trend following system lasting anywhere from 1 to 30 days. Traders who swing trade typically look for trend reversals & retracements for their entry/exit points.
- Manageable take profit and stop losses.
- Easier to learn than day trading - higher success rate than day trading.
- Spread has less of an impact into overall profits than day trading.
- Less time involved in actively trading - it is not necessary to 'babysit' your trades.
- Can be worked around a regular job - a couple of hours per day should suffice.
- Less stressful than intraday trading.
- Can be difficult to learn and become profitable.
- While it requires less time than day-trading, preparation and analyzing the markets is still necessary and can be time consuming. Tending your positions daily is a must!
- Some traders have a tendency to develop emotional attachments to a trade.
- Discipline and keeping emotions in check are very important. It is not uncommon to exit on a retrace or trend change only to have the market immediately change back and head in the original direction.
Position trading, also known as 'Trend Trading', can best be described as a 'Buy and Hold' method. Positions can be open for a few days, a few weeks, a few months or longer. They are also held during periods of minor retracement with the expectation that they will eventually continue trending in the desired direction.
- The most forgiving type of trading - small mistakes are more easily absorbed in market movement and the size of your eventual profit.
- The easiest to learn. It is estimated that up to 25% of position traders learn to become profitable.
- Less stressful than intraday or swing trading.
- Easier to become successful with smaller startup capital.
- Much easier to predict the market as in general you will be following the overall trend.
- In general position trading is the most profitable.
- Less time consuming than day trading.
- Compounding has a lot less effect on profit than both intraday and swing trading.
- Because positions can be highly leveraged and trades remain open for extended periods of time, unable to reap consistent benefits of interest.
- There is inherent risk in keeping positions open over night. It is quite possible for drastic changes to occur in the market while you sleep.
- Money can be tied up for an extended period of time. This can prevent entry into new positions as they arise.
- Because of the length of time involved in position trading, traders can experience significant drawdown with the expectation that it will turn around and start trending back in the desired direction. Psychologically this can have a very negative effect.
While position trading is more profitable, day trading is less risky. The emotional element (discipline and self control) is also of more significance while day trading. The higher the time-frame, the better the chance to succeed and become profitable overall.