Imagine you find yourself on a deserted island. Your goal is to survive until rescue arrives. Thankfully, you’re surrounded by coconut trees. The question is: how will you get ahold of these delicious coconuts? Will you:
Attempt to climb the tree
Engage your core and shake the tree violently
Create a makeshift slingshot and attempt to knock the coconuts down with high-speed pebbles
As this example shows, there is more than one way to reach your goal. The same can be said for many things in life, but especially for crypto trading - a liberal process with infinite paths and possibilities
Remember, financial markets are not linear. There are thousands of ways for a trader to make money, even on the same asset class. Some trading strategies are better than others. But whichever you choose, remember that trading is not a constrained system made of limiting rules and principles - the opposite is true.
If we were to separate traders into two distinct groups, we’d group them into day traders and swing traders. This is how we generally categorize a majority of traders because the two groups differ by one important metric: trade length.
A day trader is a person that trades on lower time frames (LTF), refuses to hold a position overnight, and executes a higher frequency of trades than other groups of traders. He executes three-to-six trades a day.
A swing trader is a person that trades on higher time frames (HTF), holds positions overnight, and executes fewer trades compared to her counterpart. She executes three-to-six trades a week, if not a month.
In this article, we will provide you with a detailed explanation of how each trading strategy works and its disadvantages. In the end, we will also provide you with insight into which style works best for you.
What Is Day Trading?
Day trading is like having a day job. You sit at your desk for a specific duration of time, do your work, and then go home to rest and relax before resuming your activities the very next day.
Day traders monitor markets, execute trades, and then leave their charts once the day, or trade session is over. Day traders do not concern themselves with macro market movements.
Day traders trade on smaller time frames (5M, 15M, 30M) and hold a trade for as little as a few minutes or as long as several hours at most. They do not hold their positions overnight. All trades are limited to intraday trades.
Day trading usually combines high leverage and short-term trading practices. The frequency at which one trades is significantly higher compared to other trading strategies. It is also worth pointing out that volatility is the lifeblood of day trading. At times, volatility represents the focal point of one’s trading session.
There are a number of circumstances for which day trading is applicable, if not more suitable than other strategies. For example, one can perform a trade based on one-time events for which the market anticipates heightened volatility. Such events include news, announcements, product launches, and business reports.
Keep in mind that high-volatility scenarios are not the only ones worth paying attention to. Certain settings and price actions with low-volatility can also favor day traders, such as LTF ranges.
Day Trading Examples
Day trading is popular among forex traders, especially those trading fiat currencies. Because of their low volatility, fiat currencies are more likely to form ranges. Day traders profit from these LTF ranges by buying and selling at the range’s lows and tops. This day trading strategy is popularly known as scalping.
Apart from scalping, we also have momentum trading. This is a day trading strategy that relies on catalysts such as news events and financial reports that drive prices up or down during a short time period.
Day traders who are active during the catalyst’s formation can, based on the speculated outcome, either long or short the asset to capture major price movements. The example below shows Bitcoin’s +7% price jump following PayPal’s crypto adoption announcement.
Last but not least, we have pattern trading. Candle patterns do not only form on HTF. There are also rare examples where assets form patterns on LTF. Common pattern types include triangles, wedges, flags, and pennants.
The following 1H BTC/USD chart shows a typical falling wedge pattern. Falling wedges indicate a bullish outcome following a breakout. Day traders expecting a successful wedge can , in this case, open a long position at the bottom diagonal trendline. Traders can also set a stop loss below the trendline to protect themselves against major losses.
Day Trading In Action
In the example below, we see that Bitcoin formed a price range between $50,279 and $50,792. One may profit from this dull volatility by buying at the low point and selling at the high. The amount of money made in such an environment is negligible; however, it adds up to a significant figure when the trader successfully performs the same trade several times.
Traders with appetites for high risk can profit even more by experimenting with leverage. If leverage is involved, one can turn a 0.3% price range into a potential 3% profit (at 10X leverage) and repeat the process multiple times — or for as long as the range holds.
Another important fact to remember is that high-frequency trading (better known as scalping) leads to compound profits. By compounding profits over the course of multiple trades, one can make more money than by ‘winning big’ in a single trade.
Let’s say we have $1000 in our account and wish to trade the previously mentioned range with 10x leverage. Here is how our meager $1000 transforms into $1159 using the combined power of leverage and scalping after five completed trades:
$1000 + 3% = $1030 ($30 profit)
$1030 + 3% = $1060.9 ($30.9 profit)
$1060.9 + 3% = $1092.727 ($31.827 profit)
$1092.727 + 3% = 1125.5 ($32.781 profit)
$1125.5 + 3% = $1159.265 ($33.765 profit)
In the end we have a total profit of $159 after five consecutive trade executions at 3% profit per trade. These five trades amount to a 15% profit and would net us only $150 if we executed it as a single trade. But since we compounded the profits over the course of five separate trades, we earned an extra $9.
$9 might not seem much now, but what would happen if we allocated more capital to this scenario? At $10,000, we have an extra $90. At $100,000, an extra $900. At $1M, the additional profit turns into $9,000, and so on.
The combined effects of leverage, high frequency trading, and compounding are what ultimately make day trading a great method for making money in the market. However, this strategy comes with significant drawbacks and risks — some of which we will explore in the next section.
Day Trading Cons
With significant rewards comes significant risks. Moreover, since this group of traders executes several trades in a single day, they may just as easily compound their losses and decimate their portfolio.
A swing trader averages anywhere from three-to-six trades per week. With a risk appetite of 2%, she can lose anywhere from 2% to 12% of her portfolio in a single week, depending on how many trades she lost.
If we apply the same example to a day trader, we see that they risk losing 2% to 12% in a single day. This can bear severe negative effects on future trading performance and the trader’s psychological state. As a result, day trading requires more discipline and strict rules when trading to avoid significant losses.
Another problem with day trading is the perceived freedom one feels being able to trade at any time of day. In order to catch significant moves that net profit, one is forced to trade when trading volume is at its highest level. According to data from BitMEX, this time period seems to rest at noon during European hours. Therefore, users who do not fall under this timezone must adjust their sleep schedule to fit into it and to have a chance at catching large moves.
Since day traders rely on leverage, their stop loss is tighter compared to those of swing traders. As a result, day traders stopout more frequently. But stopping out does not necessarily mean that one’s trade proposition is wrong. It’s entirely possible for one to get stopped out one moment and in the next have the market reverse and go the direction the trader predicted. So if the day trader is reluctant to reenter his position, he risks missing the trade.
If in an emotional state, it’s also possible for the trader to ‘revenge trade.’ In this case, he enters a position in the opposite direction of his original hypothesis out of impulsiveness — which is generally considered bad practice.
Last but not least, high-volatility events have the potential to decimate a day trader’s portfolio. News such as Microstrategy or Tesla buying Bitcoin can move the crypto market by 5%, 10%, or even 15%. If found at the opposite end of the market, the day trader risks having his entire portfolio liquidated in cases where:
A stop loss was not present
A stop loss was added too late
The exchange’s liquidation engine fails to process the stop loss
After considering all these risk factors, it is easy to understand why day trading is left to professionals. The need to constantly monitor positions, adjust stop losses, stay disciplined, and not fall victim to impulsivity is what makes day trading one of the most difficult trading strategies, especially for beginners.
What is Swing Trading?
Swing trading is a trading strategy that aims to capture big market moves. Similar to directional trading, the trader anticipates the market’s future course at longer time frames (1D, 1W, 1M) and consequently assumes a long or short position. But unlike directional traders, swing traders swing into the opposite direction once the move is complete. They do not believe in absolutes, nor do they root for gigantic crashes or parabolic rises.
Let’s take Bitcoin’s latest price action as an example.
A swing trader might believe that the crypto market is headed for another parabolic rise. However, she is certain that prices will not rise indefinitely and that a correction is far more likely to occur before a pump. The trader views the purple area as a deviation and decides to close her long and swing into a short position.
With the help of technical analysis, the trader analyzes the chart and spots several strong support levels at HTFs. In this case, zones such as $42k, $35k, and $29k have historically held well and are likely to do so in the future. For the trader, these targets represent price levels suitable for closing the short and swinging back into a long position.
If expecting a longer correction, the swing trader might want to set a take profit (TP) order at the blue zone. Once reached, the trader sets a portion of the profits aside and places the remaining funds into a long position at the same zone.
The swing trader will hold this position until another anticipated price level comes through. She will likely target an ATH spike at levels such as $72k, $86k, and $92k. After reaching the target, she will take profits and enter a short position. This is a rinse and repeat process.
Swing trading boils down to reacting rather than acting. If the market looks as if it wants to fall, the trader will not hesitate to short. Alternatively, she will not oppose opening a long if the market looks as if it has bottomed out. This is a stark contrast to day trading, where users try to fit their position at lower time frames in hopes that a macro market movement does not obliterate their hypothesis.
By following the market’s price action instead of attempting to fit their own bias onto a chart, swing traders are more likely to survive the market compared to other groups of traders. Other benefits include:
Wider stop losses due to lower leverage
Reduced need to actively monitor markets
Takes more time for a trade hypothesis to go wrong
Unaffected by short-term volatility
Swing Trading Cons
Although swing trading is, on average, more profitable and friendlier to beginners, it is still a potentially flawed strategy.
Swing trading is heavily dependent on the direction the market takes. If you bet long and the market crashes, you will not only deal with losses but also face major opportunity costs. As a result, swing traders are forced to hedge against the market and ensure that they do not miss out on profits — which becomes an extra headache to deal with.
Another drawback to swing trading is that it relies on an unrealistic ability to predict the future. The duration of such a trade ranges anywhere from two-weeks to several months. Predicting the state of the market a month into the future is extremely challenging even for veteran market participants. Moreover, retail traders deal with severe information asymmetry. They don’t have access to insider information that discloses where the market is headed next, which is why some traders see it as a fool’s quest.
If you dismiss swing trading drawbacks , wait until you hear about funding costs. Those who swing trade futures rather than spot markets have to pay daily fees to keep their positions up and running. This fee is better known as the funding rate.
Funding rates are periodic payments charged by the exchange. They are paid by either long or short traders, depending on the difference between futures and spot prices.
For example, when the market is bullish and there are more longs than shorts, the funding rate is paid by long traders. The opposite is true when the market is bearish.
On an exchange such as Binance, the funding rate is charged every eight-hours, which totals up to three fees per day. When one holds a position for several weeks, funding rates can eat up a significant portion of their allocated capital. If you add extremely high leverage into the equation, funding rate fees become an even bigger nightmare.
Swing traders have two options:
‘Deal’ with the fee and sit on their hands
Periodically increase the position to negate the fees taken by the exchange
Funding rates are generally not a problem as long as the trader’s hypothesis ends up correct. But if this is not the case, the swing trader loses not only the money she intended to risk but also the capital spent paying the funding rate.
Differences Between Day Trading and Swing Trading
At this point, you probably know the ins and outs of swing trading and day trading. But do you know how the two trading strategies hold up when compared against each other? Furthermore, let’s look at the most striking differences between day trading and swing trading.
The most obvious difference is the trade duration. Swing traders hold their positions overnight and leave the position open for weeks, if not months. On the other hand, day traders make intraday trades and will never leave a position open overnight.
Day traders are not concerned with how the market turns out in the long run. All that matters to them is the moment right now. Inversely, swing traders perceive LTFs as ‘noise’ and only care about where the market is headed on a large scale.
Risk management represents another major difference. Although both groups practice risk management, they do it quite differently.
A day trader has to be extremely precise when setting his stop loss. He also has to stay disciplined as he can’t afford to open positions on a whim. Due to the higher frequency of trades, he is more likely to face losses and is likely to decimate his portfolio in the span of 24-hours.
On the other hand, swing traders practice lax stop losses. Since they either completely avoid leverage or only use low leverage, they are less likely to trigger their stop loss. In fact, the market can move several percentage points in the opposite direction, and the trader may still avoid losses. This is perfect at times due to the fact that the market might see a reversal and head into the direction initially predicted by the trader. However, this freedom comes at the price of periodical funding fees.
Day Trading vs. Swing Trading - Which One is Better and Why?
Is it better to day trade or to swing trade? We have seen all the pros and cons of both strategies so far. However, we have yet to reach a conclusive answer.
To tell you the truth, no strategy is objectively better. What might be of greater interest to you is which strategy suits you personally. After all, markets are deeply tied to psychology and each trader has quirks, flaws, and strengths that make them better suited for a specific strategy.
Are you easily affected by stress, can’t handle looking at screens all day, and prefer to grasp the bigger picture? Swing trading is your friend. This lax approach better suits traders with less market exposure. By surviving the market for longer, you gain more experience and likewise become a superior trader.
But if you’re bad at predicting the future, think fast, and don’t mind taking on greater risk, then day trading is the way. Even though day trading demands discipline and a cold-blooded way of thinking, it is still a better option compared to swing trading if you’re the type of person that has an easier time trading in LTF environments.
Keep in mind that it will take trial and error to discover which style suits you better. Just as with anything else in the financial world, only experience and exposure can help you get better at trading as well as recognizing your strengths and weaknesses.
Want to learn more about day trading and swing trading? We recommend checking out the following links:
Investopedia — Educational portal for investing and trading concepts.
Marko is a crypto enthusiast who has been involved in the blockchain industry since 2018. When not charting, tweeting on CT, or researching Solana NFTs, he likes to read about psychology, InfoSec, and geopolitics.