Day Trading and Swing Trading on the Currency Market

There are two major trading approaches in Forex trading. They include day trading and swing trading on the currency market. Both strategies stand for playing on short-term market movements, in contrast with long-term currency exchange investment strategies.

The common dilemma of many newbie traders comes down to swing trading vs. day trading. Which one is better and more profitable? Which one requires more time? And which method is easier to master?
Here we will briefly overview these two and answer the most common questions. So, let’s first see how the day trading currency market works.

How does the day trading currency market work?

If you are pondering over the choice between day trading and swing trading on Forex, you are already more inclined to jump into the short-term and mid-term market-moving than into long-term strategy.

Day trading stands for opening and closing position during a single trading session. Most day traders use leverage and short-term trading strategies to take advantage of small price movements throughout the day.

Many day traders apply the scalping trading method that implies opening and closing positions within a couple of minutes or even seconds. This accelerated approach enables day traders to gain experience quickly while developing a consistent strategy without risk or long-term exposure.

A decade ago, the day trading technique was only available to big players on the market, such as banks. Therefore, the tricky part is that even today, many day traders are bank traders. From a broader perspective, it implies that individual traders also must compete with bank traders at some point.

Risk and Perks of Leverage

Day traders use leverage and margin trading as a tool for increasing their odds of success. For instance, in the United States, most brokers allow for a leverage of 2:1. However, some allow up to 4:1 as long as it’s reduced to 2:1 by the end of the trading day.

Leverage and margin loans entail the significant risks associated with day trading. Leverage allows rapid returns and increases the possibility of a negative balance and margin call, which every trader should avoid.

If proper risk management measures are in place, day trading can be a viable approach.

What Day Traders Look For

In the interest of a consistent trading approach, day traders often look for specific characteristics when targeting trading opportunities.

Low spreads: By definition, the spread is the difference between the bid and ask price for a given currency pair. Day traders aim for trading currency pairs with the lowest possible spread. The smaller the spread, the lower the transaction cost to trade a foreign exchange instrument. A low spread is also called a “tight” spread.

Real-time market data: Accurate, real-time market data is indispensable for day traders to be successful. In order to properly apply their fundamental and technical strategies, traders must have access to market data feeds. These are accessible thanks to the special tools offered by brokers. Having the best tools for trading requires paying a fee. The fees are generally most compared to the other charges.

Forex is particularly suitable for day trading for several reasons. Here they are:

• Liquidity: When looking for instruments for day trading, liquidity is an essential factor. With traders from all over the world, Forex is one of the most dynamic global markets.
• Volatility: Macroeconomic events involving Intermarket relationship interests, interest rate decisions, central bank policy changes, or international trade disputes can create volatile movements in the Forex market. Many day traders try to benefit from these opportunities with short-term trading.
• Flexibility: Forex trades 24 hours a day Monday through Friday, allowing daytime Forex traders to select precisely the moment for their trades. Whatever the timetable, Forex offers every trader the opportunity to tackle the global currency markets.

How does swing trading work?

Day trading and swing trading are speculative strategies. Nevertheless, in contrast to day trading, swing trading is a speculative investment strategy in which traders hold positions between one and several weeks. More precisely, it’s different from day trading because you will be holding your position for more than one trading session.

Forex traders don’t focus on a specific time for trades. Instead, they determine the start of directional price movements to enter the trade. Then they wait until the movement ends and take profit.

Forex swing traders usually have their trades open for several weeks. Therefore, it’s less time-consuming than day trading. The typical time frame for trade is about four hours. However, some Forex traders make trading decisions following 1-hour charts to fine-tune the entry and exit points.

For swing traders, there’s no need for the perfect timing to reap the profits. The small but consistent profit that involves strict risk management has a compounding effect and leads to significant returns over time.
One of the major perks of swing strategy in currency exchange is that traders can perform it by checking the currency price once every couple of hours. Furthermore, it’s suitable for the full-time employees since they can fit their trading into their working hours and leisure time.

The risks of swing trading are mainly related to the leverage usage and margin loans just as in the day trading.

Day trading and Swing trading – Which one should you choose?

So, is swing trading better than day trading or vice versa? One of the best Forex strategists, Kathy Lien, explains everything in detail in her excellent day trading and swing trading book. However, there is no definite answer.

If you still have a day trading vs swing trading dilemma torturing your mind, start thinking of these several points.

• At what pace are you more prone to execute the trade. How much time can you allow for it?
• What’s your risk tolerance level. Day trading entails more stress compared to swing trading.
• Are you prepared to completely focus on the market movements and price changes? Focus is extremely important for day traders.

Finally, day trading and swing trading are strategies that require a lot of practice and knowledge to reap profits consistently. Trading profitably takes finding the right strategy and executing the trades repeatedly using that strategy. Results will certainly come by practicing various market scenarios by using a demo account.

Day trading and swing trading are simply suiting different expectations and needs. Due to the higher frequency of opening and closing trades, day trading could be more lucrative. However, swing trading on the currency market still has a lot of opportunities thanks to the volatility of rates.