The three most popular classifications of a trader’s preferred method and time frame are Day Trading, Swing Trading and Position Trading. The common questions to ask of these styles are:
- Which style of trading do you prefer?
- Which method is riskier and more rewarding?
- Which method is more stressful?
Each method has its own advantages and disadvantages, followers and critics.
We will first attempt an unbiased description of each one, followed by a list of pros and cons.
It should be borne in mind that all markets are fractal in nature and that the same patterns play out on every time frame. Thus, the discussion about these styles is not about the pattern identified to enter or exit the trade, for the same patterns exist on all time frames. Rather the defining attributes of each method are:
- trading frequency,
- duration of trade,
- time frame used to identify a trade,
- market exposure and money management (leverage, lot size and profit target/stop loss size).
Day Trading (or Intraday Trading):
Day traders typically enter and exit trades in the same trading day (scalping is a sub-genre with this category and we explore in a separate article). Day Traders are interested in quick, bite sized profits and numerous trades per day. They are not necessarily trading the entire day; they are just interested in getting profit here and there during different hours of different sessions. They look for their setup patterns on the smaller time frame charts (1M, 5M, 15M, 30M or H1), with perhaps confirmation from larger time frames charts (H4 and D1). In terms of money management, they generally have smaller profit targets and stop losses, and thus can afford to trade with larger lot sizes. Because of the frequency of trading, day trading necessitates more time and focus on trading: the day trader is spending a lot of time actively participating in the market, much more so than the other two styles. Day trading necessitates much faster mental and physical speeds for reading and reacting to quickly changing market conditions. Accuracy is vital and so are nerves of steel.
Day Trading Pros
- Less market exposure – A briefer exposure to the market diminishes the probability of running into adverse events. They do not have to go to bed with the fear that an overnight or weekend news event will hurt them while they sleep.
- Faster profit potential: Your profits can accumulate the first day of trading.
- Faster compounding of profits: Due to the frequency of trading, compounding can dramatically increase overall profits.
- Because of smaller stops and targets, higher leverage and lot sizing can be used to increase dollar size on winning pips, which can build the account faster.
Day Trading Cons
- Spreads have more impact on overall profits.
- Faster loss potential: if you are a bad scalper, you can lose money the first day of trading.
- Faster compounding of losses: Due to the frequency of trading, negative compounding can dramatically reduce the account.
- Time intensive: if you have a family or job or other time commitments, it can be difficult to trade properly.
- Speed & concentration can make day trading very stressful. One needs nerves of steel. There is a high burn out rate.
- Real life distractions can be problematic: you can step away to use the bathroom and come back to see the market has jumped 50 pips away from you.
- Market cycles that occur on shorter time frames can be harder to predict.
Swing trading is typically a short to intermediate term trend following system lasting anywhere from 1 to 30 days. Swing traders are looking to initiate a couple of trades per week rather than per day. They look for their setup pattern on the hourly charts (H1 and H4), with confirmation from the daily (D1) and weekly chart (W1). In terms of exits, the style encourages a good risk to reward ratio: for instance, swing traders would be attempting a profit target of 300 pips with a 70 pip stop loss. The stops might be based on the previous swing high or low, or at points of previous support and resistance on an hourly chart. Given their larger stop loss relative to day traders, swing traders would probably trade with smaller lot size to minimize the risk. They don’t need to spend as much time glued to the screen, or need to react quite as fast, but they do need to be just as smart, disciplined and focused.
Swing Trading Pros
- Decent risk to reward ratio. You would be shooting for larger profits relative to your loss.
- Spreads have less impact on overall profits.
- Less time intensive: because you are not trying to make frequent trading on small time frames, you have more time for other things. You can have a regular job and spend 2 hours a day setting up your trades.
- You do not have the stress of having to decipher and trade quickly
Swing Trading Cons
- Greater market exposure: you can wake up with your positions unexpectedly altered.
- A steep learning curve to swing trade successfully.
- You still have to devote at least a couple hours per day in analyzing the markets to determine or modify a position.
- You still need good discipline and emotional fortitude. Often you will see that you exit on a seeming “trend reversal” only to see the market revert to 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. Trades are also held during periods of minor retracement with the expectation that they will eventually continue trending in the desired direction. Position traders are looking to initiate a few trades per month rather than per week (swing trading) or day (day trading). They look for their setup pattern on the larger time frame chart (D1, W1 and M1), with perhaps the best point of entry on the hourly chart. In terms of exits, the style encourages a much larger breadth of pips for profit and stop: position traders would be attempting a profit target of 250-750 pips with a 150 pip stop loss. The stops might be based on the previous swing high or low, or at points of previous support and resistance on daily chart. Given their larger stop loss relative to day traders, position traders would probably trade with much smaller lot size to minimize the risk.
Position Trading Pros
- Best risk to reward ratio. You would be shooting for much larger profits relative to your loss.
- Spreads have very little impact on overall profits.
- Least time consuming: You can have a regular job and spend just a few hours per week setting up your trades.
- Least stressful: You are not under any time pressures.
Position Trading Cons
- Greatest Market Exposure: You would be setting up long-term positions with the hopes of staying the course, but the fickleness of the markets can upset your direction. It is quite possible for drastic changes to occur in the market while you sleep.
- Smallest potential compounding: because of the infrequent trading, you would have less ability to compound your profits.
- Your money can be committed to the trade for prolonged periods, preventing the possibility of entering into new positions as they arise.
- Traders can become psychologically committed to the trade or trend direction. Because you have a few trades and long lasting ones, you can experience an emotional attachment to one trade or a direction that might prove to be false and short-lived.
Neither method is inherently less or more risky, or less or more profitable, but rather the trader or EA determines the risk and profitability. In the hands of a good trader, day trading can accumulate and compound profits faster; in the hands of a bad one, it can do the opposite. All methods require discipline and emotional fortitude. All systems, in order to be good, need well-defined stops and take profits. All need to have lots of back-testing and forward testing.
Everybody has different stress triggers. It can be argued that day trading is more stressful because it puts greater pressure on reaction time and concentration–one needs to be fast and steady with nerves of steel. Day traders can argue back that it is better training and experience to develop these qualities in the compressed time and faster pace of day trading. They can also argue that at least when they go to bed they can sleep better, without the worry of being exposed to the unexpected surprises of the market. Many of the cons of each method can be mitigated by the use of automated robots or EAs. Scalping robots can react to the markets faster than humans, reducing human error and emotion, and swing-trade / position robots can setup and manage trades while the human sleeps or is away, reducing the worry of overnight exposure and psychological commitment to trade direction.
If you are a manual trader with a job and other distractions and you are looking at the total time dedicated to trading, then perhaps swing and position trading have the highest reward/work ratio. You can set up your positions and take off to do something else, like go shopping, exercise, and spend time with family or friends. Some swing and position traders do not count the time spent reading economics, stats or charts as work because it is part of their enjoyable hobby. If you are looking at just maximizing the time you have, then scalping is the way forward. For instance, you want to devote just 2 hours a day to trading, and in that 2-hour timeframe, you hunt for scalping opportunities on small time frames during a particular trading session. In the end, each method has some facets that are right for different people’s time commitment, personality, and emotional makeup. It is advisable to try your hand at each one to see what works best for you.