Types of Trading: Swing Trading & Day Trading

Day trading and swing trading can produce huge profits but involves a lot of risk.

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A day trader is an investor who seeks to profit from the daily price movements of stocks, indexes, bonds, currencies or commodities. Being a trader is not for the faint at heart. There is unlimited profit to be made; however, an adverse price movement can wipe out your trading account. Unlike a day trader who closes out his trading position at the end of the day, a swing trader holds his position longer than one day, sometimes weeks.

Day Trading

The power of the Internet and changes in securities regulation give small investors the opportunity to trade stocks like the professionals. Day traders buy securities with the expectation of an upward price movement, called being "long," or sell securities, called being "short," with the expectation of a downward price movement. In either case, several pennies in either direction could translate into hundreds or even thousands of dollars in mere seconds. At the end of the trading day, the day trader closes out all of his trading positions, whether short or long.

Swing Trading

Day trading is a form of speculation over a short time frame. On the other hand, a swing trader speculates on price movements over a longer time horizon. Since swing traders hold their positions longer, they are not bound by minute-to-minute changes in stock prices as day traders are. It is not uncommon for a swing trader to hold a position for several weeks. However, while a typical investor holds on to his investment over months, years or through his lifetime, swing trading is still considered risky and high maintenance.

Technical Analysis

While long-term trading focuses on a financial statement analysis, day and swing trading rely on technical analysis or the study of past historical prices to predict future price movements using charts and graphs. Common technical indicators include the 50-day moving average, average daily volume and price channels.

Margin Call

Day and swing trading carry significant risks. Most traders fail to make money. In addition, to open a trading account, brokers require a minimum capital amount. Typically, a trader uses a margin account to trade securities. A margin account allows you to borrow from your broker, which gives you additional buying power. For example, a margin account with leverage of 5-to-1 means that your $10,000 capital gives you $50,000 of buying power. However, you must maintain the minimum margin amount; otherwise, you'll receive a margin call. If you're unable to fulfill the margin call, the broker can liquidate your account.