Trading stocks has been a profitable activity for people all over the world. Trading is very different from investing, which is simply buying and holding stocks for long periods. Stock trading involves buying and selling stock in short increments of time. The goal of trading stocks is to make money by purchasing low-priced stocks that will increase in value.
Trading stocks can be a great way to earn extra income outside of your day job. Stock traders categorize themselves into two groups; day traders and swing traders. However, both day and swing traders seek to benefit from short-term stock price movements rather than long-term price movements. But which strategy is better? Keep reading to understand the features of the two strategies.
Day traders use complex charting systems and technical analysis to make numerous trades in one day. The main object of day traders is to profit from trading stocks by making little profits on numerous trade positions and surpassing losses from unprofitable trade positions. Day traders normally do not hold trade positions overnight.
The potential for high profits has lured many stock traders into day trading. However, making huge profits from day trading will require certain traits, such as diligence, decisiveness, and discipline.
Inexperienced day traders may suffer severe losses in their first days of trading. The losses may lead to frustration and eventually quitting before the newbies graduate to profit-making traders. Day traders should not risk money that they cannot afford to lose as this could put them in large debt or without capital.
Features of Day Traders
- Day traders work alone and are independent of corporate bigwigs. This independence allows day traders to have flexible working schedules, work at their preferred pace, and take breaks when needed.
- Day traders compete with hedge funds, high-frequency traders, and other market professionals willing to spend a lot of money to gain a trading advantage. As a result, day traders spend a lot of capital in charting software, trading platforms, and other trading equipment like computers.
- Day traders spend a lot of time analyzing strategies and charts to spot opportunities. After sporting an opportunity, a day trader must act quickly to exploit it. Day traders do this analysis daily and require a lot of concentration and focus, which may cause burnout.
- Day trading is a full-time job. Day traders spend most of their day analyzing market trends and charts, looking for opportunities. They entirely depend on their skills to make a profit from trading stock.
- Day trading does not require college or university degrees like many jobs. However, to succeed in day trading, you may require courses in computerized trading and technical analysis, available online.
Swing trading involves identifying trends in stocks and may take several days or weeks. Swing traders may take days or weeks to analyze a trading strategy and market trends. Therefore, unlike day trading, which is a full-time job, a swing trader is unlikely to make trading a full-time job. However, a trader may be both a swing and day trader.
Anyone with capital, skills, and trading knowledge can try out swing trading. Swing traders do not need to be glued on their screens analyzing charts and indicators all day long.
Features of Swing Trading
- Swing traders open trade positions that require time to work out. Keeping a trade position open for several days or weeks might result in higher profits than opening and closing multiple trading positions of the same stock in a day.
- Swing trading involves holding positions overnight. As a result, swing trading has higher margin requirements with lower leverage ratios than day trading. In swing trading, maximum leverage is usually twice the amount of trader’s capital, while in day trading, leverage can be up to four times.
- Swing traders can use stop orders since they may not constantly monitor all open trade positions. However, a stop order risks executing and closing a position at an unfavorable price.
- While swing traders may potentially make higher profits for holding positions longer, the risk is also higher. The longer-term positions may result in substantial losses compared to day trading.
- Swing trading does not require a lot of investment in a trading platform and charting software.
Each trading strategy has different features with pros and cons. Stock traders should understand these trading strategies and choose one that aligns with their needs and goals. In addition, day traders may apply both strategies.