In the world of Day Trading, the odds are stacked against you. There’s an 80% chance you will lose money (other sources have reported it’s more like 95%) over the course of 12 months when Day Trading. If you ask me, those odds are terrible. What’s a trader to do? Well, there’s a few ways to remedy this situation, and one of them involves Swing Trading.
Day Trading vs Swing Trading
The difference between the two is simply the timeframe. Day Traders will close out of any positions prior to the market’s close each day, whereas Swing Trader will hold positions overnight.
Most of the time, Day Traders use a collection of charts that include the 5-min, 15-min, 30-min, and 1-hour all the way up to the Daily, Weekly, and Monthly charts for an anchor.
Swing Traders, on the other hand, will rarely look at charts that are lower than the Daily timeframe.
These aren’t set in stone rules, but just the average rule of thumb. So why is it that Swing Trading can boost your odds of being profitable? I mean, it would seem like holding a position overnight, or for a few days/weeks would be far riskier. Well, here’s some of the main reasons why…
Institutions Trade On Longer Timeframes
Unless they are scalping around their core positions, the vast majority of institutions do not make their trading decisions on charts that are lower than a Daily Chart. What does this mean for Swing Traders?
The higher the timeframe, the more important a price-level or trendline will be. In other words, a support level on a 5-min chart will not have the same weight to it as a support level on a Monthly Chart.
Bigger money has too much size and volume to care about what happens on an intraday chart. They need the liquidity that comes from other institutions.
This also means that your biggest trades will usually happen around Weekly/Monthly Hi’s and Lo’s.
As a Swing Trader, you can still take advantage of this and trade with the institutions. You’ll trade less (which we’ll talk more about in a second), and your potential gain will be bigger because you’re trading on a higher timeframe.
It’s Easier To See The Trend (or Rotation) On Longer Timeframes
One of the biggest mistakes you can make as a trader is to blindly follow the consensus. If you listen to the news, you will constantly hear people claiming that the market is going to crash soon. The fear is nonstop.
However, there is a difference between opinions and what the market is actually doing.
If a market is in a trend that is going higher, and it shows no inclination to reverse, then it makes no sense to fight the trend. That is a great way to get run over, and lose your money.
If you’re Swing Trading, it should be fairly easy to see if a market is trending, or if a market is rotating. If it’s trending, go with the trend. If is rotating, play it accordingly with a mean reversion strategy.
Remember, this isn’t like school or work where you have to maintain your singular opinion for fear that you might be called out if you deviate from it. You can change your mind if you think you’re wrong.
You’re allowed to change your strategy when the market has changed to accommodate a different kind of strategy (i.e. Trending Market vs Rotational Market).
If that’s a new idea to you, welcome to trading… Where opinions can turn on a dime, and all that matters is managing your risk.
The point here is that a lot of people like to Day Trade on a 5-min chart. A lot of that activity is just noise or automated computer trading. The activity that happens on a 5-min chart doesn’t really mean anything in the bigger picture.
However, the activity that happens on the longer timeframes have much more weight to future events, and so it’s important to recognize the difference.
Swing Traders Trade Less
This is one of the biggest reasons that Swing Trading can be more profitable for people in the long run. You’ll benefit from lower transaction costs, and more precise trades.
One of the biggest reasons that Day Traders lose money is that they overtrade. They chop themselves up by trading too much, taking small (but consistent) losses, and pay a ton in commissions.
Some days as a Day Trader, you’ll be fighting to get yourself out of the hole even though your PnL shows you’re flat on the day, because you know you paid a lot in commissions. Some of you are probably chuckling, because you’ve done it too.
Swing Traders Make More Money
Unless you’re a very, very skilled Day Trader the odds are better than you’ll make way more money Swing Trading. This is because (as the name implies) you’re catching the whole “swing” of the move, rather than closing your position out at the end of the day like a Day Trader.
For Day Traders who have a strict rule of closing out their positions at the closing bell each day, run the risk of losing potential profits should the market Gap Open the following day.
Not so for Swing Traders. Since they take positions home overnight, they have the ability to profit on Gaps as well.
Also, as we said in the last point, Swing Traders trade less and therefore their transaction fees and commissions are much, much lower than Day Traders.
Higher Margin Requirements
This might seem counter intuitive, but higher margin requirements will make you more money over the long run. Why? It’s because you’ll be using less leverage, and your risk of ruin will therefore be smaller.
Sure, you won’t be making as much per trade. However, you’ll be losing less on your losers with higher margin requirements, as opposed to using less margin and more leverage. Make sense?
Conclusion and Takeaways
Day Trading is a tough business. Anyone can do it though. It does not take some special gift (other than self-awareness, which is difficult to teach). However, if you are destined to sink your teeth into the market, then Swing Trading just might be the answer.
With lower frequency of trading, and therefore lower transaction costs, you’ll at least prevent yourself from losing money by purely overtrading (We’ve all been there).
The added benefit of trading on a longer timeframe with other institutional money is that it makes it easier to gain larger profits. I would just reiterate that when it comes to Swing Trading, you will most likely not want to make your trading decisions on any intraday charts and focus solely on the Daily, Weekly, and Monthly timeframes.
Anyhow, I hope this helps. If you have any questions or would like to continue the conversation further, leave us a comment below! Thanks for reading.