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Day Trading and Swing Trading on the Currency Market

In the Forex market, but also in the crypto and securities 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 ponder the choice between day trading and swing trading on Forex, you are already more inclined to move into the short-term and mid-term market than into long-term strategy.

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

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

Financial leverage

Day traders use leverage and margin trading to increase 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 viable.

Financial leverage

Forex volatility

Financial leverage is using borrowed money (debt) to finance the purchase of assets with the expectation that the income or capital gain from the new asset will exceed the cost of borrowing.

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: The spread is the difference between the bid and ask price for a given currency pair. Day traders aim to trade 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. 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 the 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 essential. Forex is one of the most dynamic global markets with traders from all over the world.

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.

Forex volatility : Traders who trade volatility are not interested in the direction of the price movements. They profit from increased volatility, whether the price goes up or down.

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 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 leverage usage and margin loans, just as in day trading.

Swing Trading

How swing trading works

Swing Trading

 

The name swing trading defines a method of investing in stock markets, which consists of repeatedly opening and closing different positions to accumulate a series of gains in a short time. Its resemblance to Day trading lies in this choice of repetitive investments during the same session.

The only difference is that the Day traders always close their positions, regardless of the closing price and, therefore, the results of their trades before the end of the session, while the Swing trader may have to maintain his positions as long as they are in line with trends and its forecasts.

A swing trader’s investments can thus last from a few hours to several days, or even longer, depending on the strength of the trend on which he is positioned. The choice of the value to be traded is thus one of the pillars of the success of a follower of swing trading.

Succeed in swing trading

In the forex market, swing trading offers optimal returns only if the trader is focusing on a volatile currency pair. The choice of a pair subject to incessant movements multiplies the possibilities of investments, an asset that corresponds perfectly to the philosophy of swing trading. Pairs such as EUR/USD and GBP/JPY are particularly suitable for this method of investing.

Also, swing trading attaches particular importance to supports and resistances. These markers allow the trader to clearly identify the channel of fluctuation in the price of the traded pair and to adapt his positions accordingly. The greater the gap between support and resistance, the greater the profits that can be expected with trading.

Breakouts at support or resistance, however, complicate the task of the swing trader. Price oscillations, therefore, become unpredictable, reducing the possibility of stringing together several winning trades. The best time to practice swing trading thus corresponds to the period when the volumes traded on the stock are lower: the variations are then numerous but remain more or less predictable and interesting for profit-taking.

Swing trading is a trading style that implies taking trades that last a couple of days to several months in order to profit from an anticipated price move.

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 focus completely 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.

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