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Explaining Day Trading and Swing Trading

Learn the difference between day traders and swing trading in forex

Forex day trading is for those traders that have enough time in the day to frequently analyze, execute and monitor trades. Whereas swing trading is better suited for those forex traders who have less time and can do trading that requires less monitoring.

The difference between day and swing traders is the amount of time spent on trades
Depending on the amount of time spend on engaging in and monitoring forex trading,
you can choose to do day trading or swing trading.  (Image by Pixabay.com)

Day trading

Day trading as the phrase suggests is trading done on the day, as such it represents the most popular form of trading for retail day traders. They'll typically trade during market open hours only, never holding trades overnight, and will typically hold trades for minutes to hours. Often many of the trades are placed into the market through an automated strategy, with many not executed due to them being placed on a "fill or kill" basis, they'll be timed to expire if not executed.

Less intense than scalping

Day traders take far less trades than scalpers, many will only trade one currency such as the euro, many will take that a stage further by only trading one currency pair, for example; EUR/USD, which historically has the lowest spreads, and is less likely to suffer slippage than many other pairs due to the improved liquidity. Many day traders will also only take one or two trades each day, or trading session.

Typically day trading refers to a style of trading in which positions are always entered and exited on the same trading day. Day traders will typically use technical analysis to attempt to find and exploit intraday price fluctuations, they'll view their charts through typical intraday time frames, such as; five minute, to one hour charts.

Relying on small gains

Day traders will also closely monitor economic calendar events, perhaps looking for high impact events to directly trade. As an example; they may either manually trade data as its published, or place their trades into the market, before the key data is released. As a consequence of trades only being held for a period of minutes to hours, large price moves aren't that common, therefore (similar to scalpers), day traders often rely on small regular gains in order to build profits. However, it's not uncommon for a currency pair to move by one percent in a day, graphically this is generally represented by price reaching either S3 or R3.

To leverage their trading ability, day traders will usually trade on margin. Day traders generally fairly quickly move into a position of regarding trading as a full time occupation, given that positions still require constant vigilance; day traders always need to be aware of any rapid change in market sentiment, and perhaps set alarms throughout the day to correspond with all the key medium to high impact news releases.

Swing Trading

Swing trading, as the description suggests, is practiced by traders looking to benefit from swings in sentiment and the corresponding price movement. Swing traders are looking for the trend to begin to swing in their favour and then enter the market and stay with that trend until it finally ends; in effect maximizing the potential profit. As with day trading, the precision of entry isn't as critical as, for example, with scalping, when a 3 pip entry miscalculation or poor fill can be terminal for a trade's success. That's not to suggest that swing traders should abandon their discipline, but if you're aiming for a 200 pip gain then, similar to our situation with day trading entries, an imprecise entry or exit due to a poor fill, or sudden price movement, isn't going to render the unprofitable.

Part time trading

Swing trading is a method highly relevant for individuals who have full time employment and can only monitor their trading positions during breaks and/or of an evening, or morning. Similar to day traders, swing traders might only prefer to trade one security and only ever hold one position in the market. Similar to many day traders, swing traders will use a combination of fundamental and technical analysis to make their decisions, positions are held for a period of days, or weeks in an attempt to capture mainly medium term market moves.

Mid-term view

Swing trading trades are generally exited when a previously established profit target is reached, or the trader may consider not exiting until they're convinced the swing has reached its exhaustion and is nearing its turning point. Similarly there are periods of time when swing traders are out of the market. If they have a target in mind, perhaps 200 pips, and it's then reached, they may exit and not be concerned if the trend then continues and they lose out on another, for example, 100 pips as they'll consider their risk versus reward to have been met. Swing traders will then patiently await for their conditions for entry to be once again fully met, before entering the market again.

Because swing trading takes place over a period of days to weeks (with an average of one to four days), this trading style does not necessarily require constant monitoring. As such, traders who are unable to monitor their positions throughout each trading session often gravitate toward this popular trading style.

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"Money is not an invention of the State. It is not the product of a legislative act. Even the sanction of political authority is not necessary for its existence. Certain commodities came to be money quite naturally, as the result of economic relationships that were independent of the power of the State."

Carl Menger - the founder of the Austrian school of economics