In my short career as a trader, I’ve gone on to make more than $7,000,000 in career trading profits… all before the age of 30.
And you know what?
When it comes to the stock market and trading… believe it or not… I have more weaknesses than strengths.
However, trading isn’t the decathlon… and in fact… the more you try to do… the worse off you can be. Heck, my mentor, Jason Bond, who I’m teaming up with this Thursday, has made a career off just a few simple setups.
And that’s the thing…
The key to success in trading is finding something that fits your schedule, risk tolerance, and objectives.
We all know that active trading is better than buy-and-hold investing. But how active should we be?
In this post, I compare the two forms of active trading— day and swing— outline the pros and cons, and then leave it up to you to decide which one fits your profile the most.
When you’re trading stocks… it helps to tailor your trading style to fit your schedule. Now, trading styles can be broken down into day and swing.
If you’re day trading… that means you’re sitting at your desk for most of the day and taking on multiple trades each day. On the other hand, if you’re swing trading… your holding period will be different.
You see, day traders will typically look to hold a stock for a few minutes or hours… but swing traders try to identify large potential swings and these strategies may take a few days or weeks to work out.
So how do you know what’s right for you?
Well, if you don’t have the time to be staring at your screens and looking for opportunities all day… then day trading probably wouldn’t suit you.
For example, if you’re a busy professional who works a 9 to 5… then swing trading may be a better fit because you don’t necessarily need to have your trading platform up at all times, and you’ll be able to go about your day.
Once you’ve figured out the time frame… the next step is to look at the nuts and bolts of each trading style.
Position Sizing and Risk Adjustments
Now, your position sizing and risk will be different for each trading style.
For example, with day trading… you may look to take on a larger position size than you would if you were swing trading.
Well, you don’t really see stocks move a lot in just one day… so in order to profit more, you may need to buy more shares in order to generate a higher profit.
On the other hand, if you swing trade… your profit potential may be larger because you’re looking to capture a larger move and can ride the trend.
Not only that, but the risk adjustments you need to make will vary.
Day traders will have a risk limit for any given day. In other words, there’s a specific amount they’re willing to lose… and after that, they’ll stop trading for the day. While swing traders will have a risk limit for the week.
For example, a day trader may look to only risk 1% of their trading account for any given day… while a swing trader may look to only risk 3% of their account on any given week.
Now, let’s get into the main difference between swing and day trading.
Swing Trades Are Catalyst Driven… Day Trades Are Momentum Driven
Generally, day trades will be driven by momentum. That means if you want to use this style… you would take advantage of short-term price moves in a stock.
Basically, you want to buy a stock and once it moves higher… you sell once there are signs that the stock is slowing down and could pull back.
For example, here’s a day trade that I took just a few weeks ago.
Basically, I had fundamental reasons for getting in… but I was also looking at the chart and noticed a bullish setup. I bought shares just as the stock started to build momentum and break out of a consolidation area.
However, once it formed the bull flag and broke out… I figured it could slow down and pull back (which it did)… so I ended up taking profits quickly… and in just a few hours I was able to lock in $14K on the trade.
As you can see, that day trade was all momentum-based.
On the other hand, swing trades are typically catalyst driven.
What that means is there may be an upcoming event (whether it be a data release or new product launch) that causes traders to buy into the event… causing it to move higher over a few days or weeks.
For example, one of my strategies is the catalyst runup. Basically, I spot a potential catalyst and pair it with a bullish chart pattern… develop a trading plan and buy shares.
The whole idea here is to capture a large move and hold for anywhere between 1 week to 4 weeks.
Here’s what I’m talking about. I bought shares of Chiasma (CHMA) based on the catalyst runup system.
There was a bullish chart pattern… and an upcoming catalyst.
In just a few days… CHMA actually announced positive data… and I was able to lock in $25K in real-money profits.
Now, day trading and swing trading are very different… and before you decide on a trading style… make sure it fits your schedule and personality.
If you’re not fast on your keyboard and can’t have your trading platform up… you might want to look to swing trade. However, if you want to make trading your career and can afford to dedicate time to trading, as well as have an account over $25K… then day trading might be for you.