Day trade vs Swing trade: -- What is the difference in Forex trading?
by Grace Cheng
Day traders typically buy and sell currencies throughout the day, in the hope that the currency price will fluctuate during the day, thus providing them opportunities to make quick profits. A day trader can hold an open forex position anywhere from a few seconds to a few hours, but will close out his position before he goes to sleep. Therefore, the day trader does not hold any overnight positions.
On the other hand, swing traders have a a slightly longer time horizon than day traders for holding an open position. Just like day traders do, swing traders also try to speculate the short-term fluctuations of a currency price. Swing traders, however, tend to hold open positions for more than one day, but could also hold them for a few hours to several days, if that is necessary in order to capture a larger movement. I will highlight some differences between day trading and swing trading Forex below:
Frequency of Trades
One way of day trading is through scalping, which is the quick and repeated buying and selling of currencies within seconds or minutes. The objective of scalping is to gain a few pips here and there, but trading with a larger volume to make up for the small number of pips gained on an intraday basis. Do you like this hectic way of trading? If not, you may choose to swing trade instead, and place a trade only when you see the opportunity to do so and hold it for a few hours or for a few days.
Since a day trader places many more trades than a swing trader would, he incurs higher fixed costs in the form of spreads for every trade he places. He must make sure that the currency pair that he trades has a very tight spread so as to increase his chances of profit for each trade. The quality of fills is extremely important to a day trader because he can’t afford to suffer any slippage.
A swing trader, on the other hand, will incur less transaction costs due to the low frequency of trades, but may be subjected to rollover fees if he sells a currency with a higher interest rate against one with a lower interest rate, and holds that position overnight. However, the rollover fees are very little compared to the spreads and the potential profits.
Type of Analysis
There are day traders who trade solely based on intraday technical signals, and disregard fundamental aspects completely, and there are those who take the larger picture into consideration when deciding their intraday trades. This contrasts to swing traders who adopt a combined approach of longer-term analysis of technicals and fundamentals when trying to determine good entry opportunities.
Swing traders, whose aim is to capture a larger move rather than small tick movements, are thus more concerned with the overall fundamentals of the currencies that they are focusing on. For those day traders who ignore fundamentals, and trade only according to their tick-by-tick system, their myopic trading eyesight may adversely affect their overall trading performance, and this is due to the fact that it is primarily fundamentals that move the markets.
They could be entering in the market at a time when important news are being released, or when most traders are sitting by the sideline and nervously waiting for data releases, and such bad timing would most likely stop their positions out.
So, no matter which style you are trading, whether day or swing trading, it is definitely more beneficial if you take note of fundamentals in general.
There is certainly merit in both day trading and swing trading, and is up to the individual to select his modus operandi to suit his own preference, and making sure that he understands the unique differences of each trading style.