Generally speaking, Day Trading and Swing Trading in the currency market are the main trading categories. One frequent question investors have about trading strategies is the difference between Day Trading and Swing Trading in the currency market. Therefore, we will explore Day Trading and Swing Trading in the currency market. We will share how they work when it comes to forex trading.
The Main Difference Between Day Trading and Swing Trading
In reality, these two strategies may seem very similar. The main difference between them concerns the periods analyzed and the time during which a trading position is open. It seems logical since Day Trading consists of closing all of your positions before the end of the session. Meanwhile, Swing Trades can keep them open for several days or even weeks.
When comparing Day Trading and Swing Trading in the currency market investment horizon, Day Trading stands for short-term and real time trading. On the other hand, Swing Trading refers to medium-term investment.
The trader who performs Day Trading will use technical analysis and fundamental strategies. In contrast, the trader who executes Swing Trading will mainly focus on technical analysis data to forecast the market moving.
Finally, when it comes to traders’ profiles, Day Trading requires spending more time in front of the screen. It requires constant attention to the charts, monitoring its positions and the evolution of prices. It, therefore, requires great awareness but also outstanding resistance to stress. Swing Trading requires less time and attention, but more mastery of trading tools such as pending orders.
What is Day Trading?
As the name suggests, Day Trading involves making speculative back and forths during a trading session. Traders start Day Trading using technical analysis. They hope to make a large number of small daily profits in a fast-moving foreign exchange market.
Day Trading is the buying and selling of assets, but only during the same day. Trading during this day can take place in any market. But most often, it happens in the Forex market with currency pairs, or the stock market, with indices.
The day trader takes advantage of the day’s small price movements by speculating during the session. However, they close all positions before the end of the day. They do not carry any current position over to the next day.
Forex traders tend to take advantage of both upward and downward movements and generate profit in the meantime.
The Advantages of Day Trading
Forex Day Trading is usually used to eliminate the need to pay fees to keep an open position overnight. These fees are called swaps. In some cases, swaps could be positive. A strategy based on acquiring assets with positive swaps is called carry trade, but this strategy is beyond this article’s scope.
Day traders are very important to the Forex market. Forex Day Trading is highly speculative, but it keeps the market running smoothly. Forex day traders provide the market with liquidity.
There are many Day Trading techniques out there. But whatever technique you want to use, make sure it matches your personality. The most common strategies are scalping and the breakout strategy.
Day Trading Strategies
The scalping strategy involves many open positions on your one-minute chart. But the main goal is to get less than ten pips of gain per trade. As well as, keeping your losses roughly the same. If you don’t know what a PIP represents, we’ll describe it below:
PIP stands for “Percentage points.” It’s the smallest price change for each currency pair. Pairs are mostly displayed with five decimal places. The fourth decimal place in a price quote is called a “pip,” while the fifth is called “nano pip.”
As for the breakout strategy, the trader looks for large movements in the market, generally caused by the price’s build up. These changes happen suddenly due to news events and press releases. A trader will thus open a position in the breakout direction to generate a significant number of pips.
It’s an effective trading strategy for those who follow economic and political news. A successful day trader needs a new plan almost every other day. Or they need to adjust their existing strategy to new market conditions.
The Swing Trading Strategy
Swing Trading is often considered medium-term trading. This is because it consists of taking short positions with trends that last a few days to a few weeks. Also, Swing Trading is primarily based on the technical analysis of historical movements in an asset’s price. It also depends on its tendency to repeat these movements.
The Swing Trader aims to capture a chunk of a price movement. Instead of seeking volatile currencies, they rather prefer more stable assets. Moreover, Swing Trading is the technique of identifying where the currency price is likely to move according to chart analysis. The trader enters the position and then takes the profit if that move takes place.
Formerly reserved for the foreign exchange market, Swing Trading is now used in many markets. It uniquely uses technical analysis to seek to determine the next price movement.
However, like Day Trading, it does not require constant monitoring of the charts.
The Risks of Swing Strategy
First of all, Swing Trading requires a perfect mastery of technical analysis and requires some experience. The unstable side of the market is also a downside for this strategy which relies heavily on probabilities.
However, as you already know, the market does not always behave in line with technical analysis data. The market remains completely unpredictable. It is, therefore, common for an asset to take the opposite trend and thus lead to significant and unforeseen losses.