Active trading is all about day trading and swing trading. Both strategies aim for profits from short-term market movements, but they're not quite the same. This guide will clarify these strategies, highlighting their distinct characteristics and differences.
Swing Trading Vs Day Trading
What is Day Trading?
Day trading involves a high-speed approach. You're in the stock market to make quick trades, buying and selling all in one day.
This method focuses on leveraging small price movements in the market. You must have sharp analytical and technical skills to exploit short-term trends. Day traders aim to dodge the threat of market shifts that happen after the trading day ends. They do this by not holding any stocks overnight, avoiding unexpected losses from these after-hours changes.
Day Trading: Pros & Cons
| Advantages of Day Trading | Disadvantages of Day Trading |
| Potential for quick profits | High stress and fast-paced |
| No overnight market risk | Requires constant market monitoring |
| Opportunities in both rising and falling markets | High transaction costs |
| Direct control over trades | Steep learning curve |
| Immediate results | Risk of significant losses |
What Does Swing Trading Mean?
In swing trading, traders hold stocks for several days or weeks to catch higher price changes.
They don't trade as often as day traders. They handle overnight market risks, meaning they incur overnight funding charges due to holding positions for extended periods.
Swing Trading: Pros & Cons
| Advantages of Swing Trading | Disadvantages of Swing Trading |
| Potential for higher profits per trade | Exposure to overnight market risk |
| Less time-intensive than day trading | Requires patience and discipline |
| Lower transaction costs due to fewer trades | Risk of significant losses |
| Suitable for various market conditions | Requires thorough market analysis |
| Allows for more strategic planning | Can be impacted by external events |
Difference Between Day Trading and Swing Trading
| Day Trading | Swing Trading |
| Involves multiple trades per day | Holds positions for days to weeks |
| Focuses on small, frequent gains | Aims for larger gains per trade |
| Closes positions daily to avoid overnight risks | Accepts overnight risks for potential larger rewards |
| Requires constant market monitoring | Less time-intensive on a daily basis |
| Higher transaction costs due to frequent trading | Lower transaction costs but exposed to overnight fees |
Which is More Profitable: Day Trading or Swing Trading?
Profitability, in this case, depends on personal skills and market approach. Day trading can offer quick, albeit smaller, returns through frequent trading, requiring intense focus and swift decisions. Swing trading is slower but targets larger gains per trade.
Technically, both methods require a deep understanding of market dynamics and involve high risk anyway. So, the profits earned would depend on the trader's time availability, risk tolerance, and trading expertise.
How to Manage Risk
In Day Trading
- Stop Loss: A pre-set order to sell a stock at a specific price, limiting losses if the market turns.
- Risk to Reward Ratio: Balancing potential loss against gain - like risking ₹1 to make ₹3 - to ensure a trade is worthwhile.
- Demand and Supply Zones: Areas on a chart indicating where significant buying or selling has occurred, helping predict price movements.
- Position Sizing: Deciding how much capital to invest in a trade, ensuring no single trade risks too much capital.
In Swing Trading
- Identify the trend: Watch the general market or stock direction to guide trades.
- Support and Resistance Levels: Know these key price points where stocks often change direction to plan trades.
- Stick to Your Strategy: Maintain discipline by following your predetermined trading plan.
- Trailing Stop Loss: Use this moving stop-loss order to secure gains and limit losses as prices fluctuate.
Taxation on Day Trading and Swing Trading
For day traders in India, the income tax department treats profits as equivalent to income from a business. This means these earnings are subject to taxation according to standard income tax rates. If a day trader incurs losses, they can be balanced against any other business income within that year but not against salary. Should the losses be more than other business earnings, they can be carried forward to the next eight years, helping to reduce taxable income in those years.
Swing trading has a different tax structure. Holding investments for over a year before selling? Your profits will be taxed at 10% as LTCG. And if you hold for less than a year, a 15% tax on STCG applies. Losses in swing trading are also carryovers for eight years. Traders can use these losses to adjust against short-term and long-term gains. But do remember that losses on long-term holdings can only be adjusted against long-term gains.
Is swing trading better or intraday?
It really depends on you. Swing trading is usually less stressful and can work well if you're patient. Day trading is more hands-on and fast.
I am a beginner. Can I start with swing trading?
Swing trading is much simpler to start with - it doesn't need as much quick action as day trading.
Should a beginner try day trading?
Beginners should take time to learn and practice a lot before diving in.