Intraday, Day, or Swing Trader: Which one are you?

A common question in trading, particularly at the beginning of a trader’s journey, is what is the most profitable form of trading? Unfortunately, the answer to this question is very different for everyone, as we are all unique, we exhibit different behaviours, and we all have different amounts of capital and time to invest.

What a trader should really be asking themselves is what kind of trader they are, in order to understand what type of trading will work best for them. Figuring this out is quite fundamental and requires a lot of time to make the decision, especially if you are looking to trade for a living. 

That’s why in this article, we will be exploring some of the main types of trading you will encounter, including intraday trading, day trading, and swing trading. We will be looking at the subtle differences between them, how to identify them and how to choose which one is right for you.

Intraday Trading

The term intraday is shorthand for “within the day”, which from a trading perspective, refers to the process of purchasing and selling stocks on the same day before the market closes. Intraday traders will manage their open positions in terms of seconds, minutes, and hours, with the overall goal of making the most out of the rapid fluctuations in price.

Many intraday trading strategies are heavily steeped in technical analysis, particularly focusing on price action. The focus on price action itself is crucial to making informed decisions, especially when trading on shorter timeframes.

Intraday traders require a significant amount of depth and liquidity in the markets they are trading as they will be required to enter and exit the market seamlessly without any hindrance. The better the liquidity, the lower the trade-related costs. Intraday trading strategies rely on accumulating small profits while taking on reduced risk

Below are a few types of trading strategies synonymous with intraday trading:

  • Scalping – Scalping is a popular trading strategy that has been around for a very long time. In this trading method, traders buy and sell stocks multiple times within a day for a small profit.
  • High-frequency trading – High-frequency trading, orHFT, is a form of algorithmic trading defined by high speeds, high turnover rates, and high order-to-trade ratios that leverage high-frequency financial data and electronic trading tools.
  • Order-flow analysis – Order flow trading is analysing the flow of trading orders and predicting future price movements based on their impact on price.

Day Trading

Day trading is similar to Intraday trading, and you would be forgiven for thinking they are the same. However, there are marginal  differences that set them apart.  Day trading is when a trader, on any market, opens a position with the purpose of exiting the position only when the market is closing.

Despite the similarities to Intraday with regards to  day traders trading within a day, these types of traders trade in much lower volumes. In fact, day trading is focusing on quality, not quantity. It is common for day traders to make 1 or 2 trades per session, trying to focus on finding that one premium opportunity per trading session. Simply put, a day trader’s main focus is to identify the best opportunities of the trading day,  exercising a great deal of patience, and holding on for larger profits, until the market closes.

Below are a few types of trading strategies synonymous with day trading:

  • Trend following – Trend trading is a strategy that involves analysing a financial instrument’s trend direction. For example, say Apple has just announced the successor to their latest iPhone, and the reception worldwide is positive, and the market trend is heading upwards a trader would likely enter the market, going long.
  • Momentum – Momentum trading is a trading strategy in which traders open positions on instruments that are rising and then close the position once the instruments look as if it has peaked. The aim here for the trader is to harness the volatility by identifying buying opportunities for the shorter-term trends, and then selling once the instruments lose their momentum. Momentum trading can be used across all markets; however, it is most often used by Forex & stock traders due to the volatility and liquidity of those markets.
  • Range – Range trading is a trading strategy that makes the most of non-trending markets by recognising consistent high and low prices, known as resistance and support levels. The goal here is to trade within a pre-defined narrow range,  buying and selling when an asset is oversold or overbought. This strategy for day trading can be applied to instruments across multiple asset classes.

Swing Trading

Swing trading is specified as a trading strategy for traders making short-term trades that last anywhere between a day, and a few weeks. Swing trading aims to gain from smaller incremental price movements within a wider trend. Swing traders recognise these fluctuations as opportunities for profit.

Swing traders primarily focus on fundamental analysis when trying to identify trading opportunities. That does not mean to say they do not use technical tools and  indicators though, in fact, these are used to help identify the most optimal entry point, working with macroeconomic trends and other political factors from around the world.

Swing trading is considered to be one of the best types of trading for beginners, as it gives new traders a lot more flexibility. Swing traders open trades for longer periods than both intraday and day traders, allowing them to make better decisions as they are able to take their time analysing the fundamentals and the technical side with tools and indicators.

Below are a few types of trading strategies synonymous with swing trading:

  • Fibonacci Retracement  The Fibonacci retracement is a form of strategy utilising chart patterns that traders use to identify the levels and ranges at which an asset price will either rebound or reverse. These reversals can be either upward or downward and are found using the Fibonacci sequence (0, 1, 1, 2, 3, 5, 8, 13, 21, 34, and 55 to infinity). This sequence in trading provides retracement ratios (23.6%, 38.2%, 61.8%, and so on) that help predict retracements in the asset’s value.
  • Support and Resistance – Support and resistance are specific price points on a trading chart that are expected to draw the greatest amount of either buying or selling. These support and resistance levels are seen by traders who use technicals as essential when getting a feel for market sentiment and supply and demand.
  • Breakout Forex Trading –  The aim here is to try and identify a position as soon as the uptrend is emerging, looking specifically for breakout positions. Once the price breaks, this is an opportunity to open a position.

Which type of trading is the most profitable?

Before trying to tackle such a question, to avoid any misinterpretation, we should first make the distinction between successful and profitable. This question is asking which is the most profitable, not what is guaranteed to make you profit. This is addressing which type of trading has the most potential for bigger returns.

Regardless of how you trade, you are putting your capital at risk, and there is no way to avoid them completely – the risk of loss is ever-present. When deciding what type of trader you are, you need to take into consideration your lifestyle, your risk appetite, and how much time you can dedicate to trading every day.

So to answer this question, it entirely depends on you as a trader. Fortunately for you, most brokers like Eightcap, offer you a demo account to help you familiarise yourself with the platform and to test various strategies and tools. These demos are a great way for you to find out how you trade in a controlled risk environment, helping you to figure out your own personal trading preferences.

Preferred time frames and chart setups

Most traders will agree that the longer the time frame is, the more reliable and accurate the signals being given. Analysing any asset in shorter time frames can be misleading, as fluctuations in a shorter period can seem more significant. This is why many traders prefer and opt for a slightly  longer time frame, to see the overall trend.

Below are some examples of which time frames are associated with the types of trading we are discussing:

  • Intraday Trading – Intraday traders, particularly those who will be “scalping “ the markets will likely prefer to use small time frames such as minutes and hours, as these traders will be making trades within the day.
  • Day Trading – Day traders may prefer to  make trades based on 15-minute charts or use 60-minute charts to identify the primary trend and then switch to  a five-minute chart to identify the short-term trend.
  • Swing Trading – Daily, or weekly charts will be preferred for swing traders, as they can use weekly charts to define the primary trend and a 60-minute chart to identify the short-term trend.

Capital requirements of different types of trading

Again, a common theme in this article is that it depends on who you are and what type of trader you want to be. In trading, there really is no one size fits all, it is  a long journey to discover how you will trade, and also what risk you are comfortable being exposed to.

That being said, with any trading account, it is recommended to not risk more than 1% of your trading account balance on any single trade. So for example, if you have in your trading account, a balance of $10,000, the maximum loss that a trader should take is $100 on any given trade. The reason is, that it gives traders more capital to diversify and not put all of their eggs in one basket, which is a very common risk mitigation phrase in trading.

For swing trading, the same 1% rule applies, however, swing  traders will need to take into consideration other factors, as the open positions will not close within the same day,  they are holding on to an open position through a market’s close. These other factors include carry and finance costs (Swaps) to keep the position open, systemic risk exposure and extensive margin requirements.

Conclusion

By now, it should be clear that finding out which type of trader you are, requires you to ask yourself questions about the amount of capital you are willing to risk, how much time you can dedicate to trading, and determining what your overall goals are. Once you have answered these questions, you will then have a great foundation to decide what type of trader you want to be.

Ultimately, the best way to learn what type of trading suits you and your lifestyle is to recognise how you approach trading. So take your time, do your research, ask questions, and try a demo account. What assets work for you? Do you prefer trading more in the evening? Do you have enough time to manage many different positions throughout your day? All these questions will help you come closer to your decision. You may even find yourself switching between different types of trading as you grow and change in your trading journey.