Swing trading is a style of trading that holds an open position(s) at least overnight and up to several days or even several weeks. It can combine both the technical analysis aspect of day trading and the fundamental research aspect of investing. Swing trading still involves active position management but utilizes longer time intervals to determine price targets and stop-loss levels. Many prefer swing trading as the wider time frames tend smooth out short-term “noise” resulting in a more calmer experience compared to the frenetic pace of day trading.

Swing Trading Definition

Swing Trading Vs. Day Trading

Day Trading

As the name states, it’s “day” trading which limits the trading activity to a single daily trading session. The United States equities markets officially open for trading at 9:30 am EST (Eastern Standard Time) and close at 4:00 pm EST every Monday through Friday. Day trading is a style of trading that seeks to profit from buying and selling stocks (or any tradeable financial instrument) intra-day and closes out all positions before the market close. This style doesn’t incur overnight risk since everything is closed out to cash by the end of the day.

Day Trading Definition

Pre-market trading can start as early at 4:00 am EST. through ECNs (electronic communications networks) and close at 8:00 pm EST. Check with your specific online broker to confirm access information.

Similarities Between Day Trading and Swing Trading

Day trading and swing trading share many similarities. In fact, swing trading can almost be considered a form of day trading that is performed on a much larger time frame. The same type of trade management and pattern set-ups are utilized, but with wider price ranges.

Seeks To Profit From Near-Term Price Action Versus Buy and Hold Investing

Both day trading and swing trading seek to profit from relatively shorter/near term price action compared to a buy and hold investment strategy. Long-term investments may be held for years in a passive capacity. Day trading involved the most active management from minute to minute. Swing trading still requires monitoring depending on the holding time, but can range from hourly to daily.

Pattern Set-Up Based Trades

Both day trading and swing trading revolve around playing chart pattern set-ups using technical analysis. Day trading focuses on the shorter time frame version of a particular pattern, while swing trading focuses on the longer time frame version of the pattern. By using a combination of indicators and pattern set-ups, both types of traders seek to enter and exits positions for a profit, while managing risk and reward.

Can play both sides of the market

Both day trading and swing trading can play long or short positions. While any exposure in the market either long or short can bear risk, a short position tends to carry much more potential risk due to the possibility of a short-squeeze. Overnight and swing short positions must be monitored more carefully since these require the use of margin to borrow shares. The potential of loss is technically unlimited.

Differences  Between Day Trading and Swing Trading

Timeframe

Swing trading encompasses a longer holding period due to utilizing wider time frame charts. The charting time frame intervals commonly used for swing trading are 15-minutes, 30-minutes, 60-minutes, daily and weekly. Traders looking for more precise entry and exits will shift to the 1-minute and 5-minute charts for trade executions. 

Chart Types

Overnight Event Risk

The literal distinguishing difference between day trading and swing trading is the overnight event risk factor. Day trading takes no overnight positions, whereas swing trading involves taking overnight position(s) that can span up to several weeks. Day traders believe that the uncontrollable and unpredictable nature of an overnight event is too much risk to bear, especially since they have no access to curtailing the risk in the wee hours of the morning before the market opens. Overnight event risk can be as common as a gap down in the S&P 500 futures to a surprise unexpected earnings warning, which can spell disaster for a long position.

Swing Trading Holding Period

Less Monitoring/Efficiency/ Less Time Constraints

Swing trading requires less up close monitoring compared to day trading, where seconds to minutes matter the most. This makes swing trading more convenient for traders who have full-time jobs or limited market access during the trading day. Traders who have a more passive temperament or get wiggled too much with shorter time frames tend to prefer swing trading.

Less Trading Activity

Swing trading costs less in commissions due to the smaller frequency of trades compared to day trading. Swing trades may total just a few traders per week compared to the tens to hundreds of trades that an active day trading may execute.

Swing Trading Under PDT Rules

Traders that do not meet the minimum $25,000 balance under PDT (Pattern Day Trader) rules may consider swing trading since overnight positions do not qualify as intraday roundtrips. The PDT rule limits traders to three intraday roundtrips if the balance is under $25,000. Swing trades bypass this stipulation since all positions are held a minimum of one overnight.

Day Trading vs Swing Trading

Larger Price Moves

Swing traders can take advantage of larger price moves (i.e. multi-day runners) that may target several points compared to day traders that may target only 10 to 30 cent scalps. However, the larger price swings cuts both ways. Larger stop losses are also used with swing trades. To offset this volatility risk, swing trades tend to hold smaller sized positions (ie: 300-500 shares) compared to day trades that can maximize the use of leverage (ie: 1000-5000 shares) by concentrating on very small holding periods that may last from seconds to minutes.

Tools of the Trade

Whether day trading or swing trading, there are certain basic tools of the trade that you will need in order to give yourself the best chance at success.

Technical Analysis

This is the style of research that only focuses on the stock’s price action, not the business operations. The stock’s price history is analyzed on a chart to identify and anticipate commonly recurring price patterns. Traders attempt to capture profits by placing trades

Charts

The most basic tool of technical analysis is a price chart. There are many types of charts including candlestick, bar and line charts. The charts are also segmented into different time intervals. Day traders tend to prioritize shorter time frame intervals like the 1-minute, 5-minute and 15-minute charts, which are most effective for intraday trading. Swing traders prefer to use larger time frame intervals like the 60-minute, daily and weekly charts. The wider times frames allow for smoother price action.

Stock Charts

Chart Patterns

Chart patterns are based on recurring historical price action. They depict price breakouts or breakdowns. Breakouts form when demand overwhelms supply and causes the price to break out of the current price range as it rises higher forming an uptrend. An uptrend makes higher highs on bounces and higher lows on pullbacks.

Breakdowns form when price falls lower from the current trading range and continue to fall progressively lower forming a downtrend. A downtrend makes lower highs on bounces and lower lows on sell-offs. The method in which price forms these breakouts and breakdowns are identified and labelled for future reference and triggers. Common chart patterns include triangles, head and shoulders, wedges and flags.

Technical Indicators

Technical indicators are pre-programmed chart tools that measure various factors to assist the trader in analyzing support, resistance and overbought/oversold reading in order to identify trade triggers. Trade triggers are buy and sell signals generated by the price action relative to the specific pattern.

Technical Indicators

Price and Momentum Tools

Price tools like moving averages and trend lines help to track the direction of the underlying stock. Momentum tools like stochastic, RSI and MACD help to determine if the price move is in the early stages or getting long in the tooth. By combining price and momentum indicators, traders are able to measure and pinpoint entries and exits with improved precision.

Relative Strength Index

Fundamental Analysis: Earnings/News/Press Releases

Fundamental analysis is the research of a company’s operations. Earnings reports tend to have the most material impact on stock price. Both day traders and swing traders will need to pay attention to fundamental analysis to some extent. Day traders will benefits from knowing what may be causing the underlying price gap up or down in a stock. Swing traders will pay more attention to the fundamentals and any relevant data from the company since they are most affected by event risk, especially overnight. The longer the holding time, the more emphasis is put on the news and fundamental factors since stock prices eventually reflect how the underlying business is operating and how the market believes it will perform in the future.