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 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:
1. Choice Of Time Frames -
Day Trading is carried out on lower time frames such as 5 min chart, 15 min chart or 30 min chart etc, the amount of pips that can be made per trade are typically not as high since the day trades last only for few min to few hours. However, the swing trades on the other hand are carried out on bigger time frames (1 hr chart, 4 hr forex chart , 8 hr chart etc.) ad they sometimes last for as much as few days. As a day trader your primary concern is to catch intraday swings. Your trades start and finish the same day. Your world is the day you are trading in. You don't care what will happen in the market tomorrow or the day after tomorrow. Your objective when trading is focusing on the appropriate time frame chart. My opinion is that day trading should be done on a 1, 5 or 10 minute bar chart. Remember, you are looking to capture several fast and short moves during the day and hence you must focus on the charts that best illustrate events as they happen in a short period of time. However, the fact that you are day trading on a 1,5 or 10 minute bar chart does not mean you cant use a larger time frame chart for the purpose of analysis. This however, is very subjective and depends very much on the traders' strategies and methods of trading. As an example, many day traders would look at one hour bar charts in order to have a view of how the market has been behaving in the last week. Is it moving sideways (and so maybe I should only place trades between support and resistance areas)? Is it trending (and so maybe I should only be looking at placing trades in the direction of the higher time frame trend)? Are there any major support and/or resistance levels I should be aware of (areas where I should refrain from placing trades since it is uncertain how the market will react when reaching them)? Did the market brake out of a congestion area? Again, it is very subjective. Some day traders believe that with proper larger time frame analysis they can select better their day trades. My personal opinion is that the more you analyze the more conflicts you will have and the more uncertainties will appear (especially if you are new to trading). I like making things simple and I found it very useful when trading (proof of this is that all of the trading systems I use are 100% mechanical). Don't get me wrong, this is not to say that larger time frames should not be used at all for analysis purposes. But, try to keep it simple and if you see that looking at larger time frame charts interferes with your correct decision process when placing day trades then simply stop.
However a swing trade lasts between 4 hrs to 1 or 2 days depending on the timeframe. If you are a swing trader holding a position for more than one day, 5 and 15-minute charts will generate too many short-term signals. The most reasonable time frames to follow are the daily charts, the 240-minute charts (which break down to a 4-hour time frame), and the 60-minute charts. As far as using pivot points, it is important for swing traders to pay attention to the daily pivots as well as to the weekly and monthly numbers to help give a potential entry or exit target price but also to help be aware of any confluence of support or resistance for those various time periods.
2. Risk Needed Per trade -
Since the Day trading is done on lower time frame and lower profits can be made, the amount of pips risked per day trade is also very less as compared to Swing Trade. In day trade, the risk is in tune of 15 to 30 pips depending on the time frame being used to place the trade. Swing trade on the other hand requires risk ranging from40 pips to as high as 80pips.
3. Application of Technical Analysis -
Both Forex Day Trading and Swing Trading are typically carried out using Technical Analysis. However it is said that the higher the time frame, the more accurate the technical analysis becomes. Due to this, technical analysis is more accurate in Swing Trading than in Day Trading. 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 technical 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.
For both form of trading there are some specialized technical indicators. For e.g. Use of Daily Pivot Points is used in Day trading to identify Support and Resistance levels.( I will supply you with these datas on the daily basis. Just check my blog site daily)
4. Overall Costs -
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.
Summary
When choosing a particular trading style, it should be seen which form of trading are you more comfortable with and how much are you ready to risk in each trade.
The above points can help you choose a form of forex trading.
But choosing a form of style to trade forex is just one part of the game, the next and important point is to find a reliable Forex trading system that can make money consistently. And if you can come across a course that not only teaches you such a reliable system, but also explains you the important money management principles, that is fantastic.
