Compare trading styles: Day, swing and position trading

How to choose the right trading style

In online trading, it’s crucial for traders to have a clear trading plan and strategy for how they’ll try to profit from the opportunities in global markets. Therefore, choosing a trading style is necessary for traders of all levels.

Trading styles refer to the approach or set of rules that a trader uses to make important decisions about their trades; including when to enter and exit markets, how to analyse the assets, what tools to use, and what kind of risk management strategies to adopt.

When choosing a trading style traders should consider their budget, how much time they have available, and also be aware of their own personality and risk appetite.

In this article, we will explain popular trading styles further and compare their characteristics to help you identify the most suitable style for you.

Day Trading

Key characteristics of the day trading style:

• Positions opened and closed within the same trading day
• Focuses on capturing intraday price movements and momentum
• Utilises technical analysis, chart patterns, and volume indicators
• Requires disciplined risk management and adherence to predefined trading plans
• Places emphasis on liquid assets with high trading volume and volatility

The term day trading gives a direct meaning to the style where traders make multiple trades in the market within a single day. Day trading can also be called intraday trading. Day traders don't hold trades overnight, which means they will close all their open positions before the close of the market.

The day trading style takes advantage of short-term price movements either in the direction of the general trend or against it. Day traders try to make multiple small profits and also cap smaller losses, and the strategy is applicable to high volume products like stocks, commodities, indices, and currencies.

Day traders mostly use technical charting skills to spot opportunities and sharp movements in prices that occur with high-impact news releases. They will trade on short timeframes, typically ranging from minutes to hours. Scalping is a type of day trading where traders open and close trades even faster. These time frames can last just from a few seconds to a several minutes.

As day trading is a fast-paced trading style, it requires a lot of commitment from the trader to monitor the price movements and can lead to emotional stress. Other risks in day trading include overtrading, high costs due to executions and commissions, and unexpected short-term volatility. Psychological discipline and effective use of risk management tools is essential in day trading to avoid emotional decision-making.

Swing Trading

Key characteristics of the swing trading style:

• Positions are held for several days to weeks to capture medium-term trends
• Relies on technical analysis, chart patterns, and trend-following indicators
• Aims to enter trades at key support or resistance levels to maximise profit potential
• Requires patience to allow trades to develop and unfold according to the market's rhythm
• Often involves setting wider stop-loss orders to accommodate market fluctuations

Swing traders will hold positions for a longer time than day traders to allow for a more significant price change, and potentially accumulate larger profits. Swing trading takes advantage of the momentum of a financial instrument that prevails over days or weeks. They typically use technical indicators, such as Moving Averages, to identify an ideal moment to enter a trade and make most of the price movement.

The swing trading style gives traders more time to analyse and research about a market before entering a position. It’s considered a more relaxed approach to day trading, as the trader doesn’t need to keep monitoring their open positions constantly. However, swing trading requires a patient and calm mentality as traders will need to avoid panicking and closing their positions prematurely or not funding their account sufficiently to ride through volatility waves. For example, traders may experience temporary drawdowns before reaching profit targets, which could lead to a significant loss if a position before the price rebounds.

Swing moves can generate high profit margins but there is also a risk for bigger losses. Unlike day traders, swing traders hold their positions overnight and sometimes over weekends too; leaving their positions exposed to price gaps, adverse news events and other risks that might unexpectedly affect the price of an asset and the value of trader’s position. Therefore, well-planned risk management and thorough research is essential for successful swing trading.

Position Trading

Key characteristics of the position trading style:

• Positions are held for weeks, months, or even years to capture long-term trends
• Focuses on fundamental analysis, macroeconomic trends, and geopolitical factors
• Emphasises the identification of major market themes and structural shifts
• Requires a broader perspective and tolerance for market volatility and drawdowns
• Often involves setting wide stop-loss orders to accommodate long-term market fluctuations

Position trading is a long-term trading strategy, and traders usually hold their open trades from weeks to months - or even years.

This trading style ignores short-term price changes and short-term trends, and instead relies on identifying profitable long-term trends. Position traders often base their trading decisions on fundamental analysis, considering macroeconomic and microeconomic indicators. It’s useful for position traders to be competent with technical concepts, focusing on longer time frames.

Position trading is the least time-consuming of these three strategies as market participants don’t need to monitor their open positions as much as in day or swing trading. However, more capital is usually required for position trading since positions have to go through larger market cycles. A weekly pullback can be a significantly bigger than an hourly pullback, hence the need to have enough capital to withstand these big price changes.

This strategy also requires patience and discipline to withstand temporary market fluctuations. Psychological resilience is essential to avoid emotional reactions to short-term price movements.

Comparison of day, swing, and position trading styles

Every trading style has its advantages and flaws. Let’s compare these three styles when it comes to time consumption, capital requirements, costs, and risks.

Time consumption: Day trading is the most time-consuming of these styles as day traders have to constantly monitor the markets and charts and withstand high levels of stress compared to swing and position traders. However, a day trader squares out their positions within a day and doesn’t need to monitor open trades in the long term. Swing and position traders have a comparatively relaxed approach; but these styles require more patience, capital and technical ability to maintain open positions for longer.

Capital requirements and costs: Trading online involves different kinds of costs, including transaction costs and overnight fees. As day traders open multiple position in a single day, they might face more transaction costs but as they close their positions at the end of the day, they avoid any overnight fees. For swing and position traders, the situation is the opposite as they might have less transactions costs from opening less positions but as they hold their positions open for longer, they are exposed to more overnight fees and other costs. Position trading might require larger amount of investment capital for this reason, as trader needs to have enough capital to keep their trades open across volatility cycles.

Risks: Main risks associated with day trading including overtrading, emotional stress, and the volatility of intraday markets. Volatility risk and market risks are the main challenges in swing trading. Both swing and position trading share the risk of price gaps, as positions are held overnight and for longer time periods. Risk management is crucial for all trading styles and traders should choose their risk management tools and strategies based on the risks involved for their chosen trading style.

The choice of the best style ultimately depends on the individual trader and their needs and objectives. It’s necessary that the trader practices their chosen trading strategy with a risk-free demo account first to get a feel for how each approach works in practice.