How to Start Swing Trading as a Day Trader

If you’re a day trader with a lower account balance or with obligations to attend to every day, making the switch to swing trading might be right for you. Swing trading is a comparable type of stock trading that takes advantage of price movements that occur over a few days rather than hours. Read on to learn more about swing trading, its benefits and drawbacks and a few of the top brokers Benzinga recommends for short-term investing. 

What is Swing Trading?

Swing trading is a type of short-term trading strategy that aims to capitalize on price movements that occur on a day-to-day basis. Swing traders use their initial capital to purchase an asset they believe to be undervalued and hold the asset until it rises in value. Under most types of swing trading strategies, this holding period might range from a few days to multiple weeks. When the asset reaches the price target, the investor sells it and takes the difference from the initial investment and the sale as profit. 

The main difference between swing trading and day trading is the holding period of the trades. Swing traders will usually hold positions for several days to weeks, while day traders hold positions for only a few minutes to hours. As a result, swing trading requires less time and attention than day trading and is often less stressful because investors don’t need to be monitoring their investment on a minute-to-minute basis. However, swing traders are also exposed to more market risk, as they hold positions for a longer period of time.

How Does Swing Trading Benefit Day Traders?

If you’re currently a day trader feeling the pressure of following fast price movements, you may be considering making a switch to swing trading. Day traders often find that swing trading strategies are less mentally demanding because they take place over the course of days or weeks instead of minutes or hours. This trading method can produce a number of secondary benefits, including the following. 

Pattern Day Trader Benefits

The pattern day trader rule is a regulation set by the U.S. Securities and Exchange Commission (SEC) that requires traders to maintain a minimum account balance of $25,000 in their account to make daily trades without restrictions. If the balance in an investment account is less than $25,000, the investor who owns the account is limited in the number of day trades they can perform. 

The criteria for being classified as a pattern day trader include:

• Making four or more day trades in a rolling five-day business period.
• Trading more than 6% of your account’s total net worth in the previously mentioned four trades.

If you are classified as a pattern day trader and you do not meet the $25,000 minimum balance requirement, your brokerage firm will restrict you from making additional day trades until you bring your account balance above the minimum. If you fail to meet the minimum, the SEC may restrict your trading account for up to 90 days. 

Swing trading, on the other hand, involves holding positions for longer periods, typically several days to weeks. Since swing traders do not make frequent day trades, they are not subject to the pattern day trader rule. So long as the swing trader holds each asset for at least 24 hours before selling it, there are no account value-based restrictions on how often the investor can trade. 

This loophole can make swing trading ideal for investors who don’t meet the $25,000 account minimum for a number of reasons. Swing trading strategies can help newer investors learn to navigate the market and interpret technical indicators in situations with lower pressure compared to day trading. 

As you improve and refine your trading strategy, you can add value to your account over time. Once you’re able to consistently maintain a trading balance of at least $25,000 worth of assets, you’ll be able to execute as many day trades as you care to without facing restrictions.

Risk Diversification

Day trading strategies usually focus on short-term trades, which can be more volatile and risky. By incorporating swing trading into their strategy, day traders can diversify their portfolios and reduce overall risk exposure. 

Swing trading allows you to hold positions for several days to weeks, rather than just a few hours at most. This factor can give you more time to analyze the market and make informed decisions without the pressure of having to make quick trades throughout the day. For example, you might be able to schedule more time to review your newsfeed, giving you more insight on upcoming product launches and earnings report dates that can influence your profits. The decreased pressure can be another benefit that draws beginner investors to swing trading over day trading. 

Flexibility

Day trading requires constant monitoring of the market and a high level of attention and focus. Day traders need to be able to quickly identify potential opportunities and make decisions on the spot, which can lead to multiple high-pressure situations a day. If you’re a newer investor or you’re still refining your short-term trading strategy, this pressure can lead you to make mistakes that you wouldn’t normally make if you were able to analyze the situation slowly. 

Swing trading gives you more time to analyze the market and make informed decisions without the pressure of having to make quick trades throughout the day. Swing traders can take a more relaxed approach to trading as they don't need to be constantly monitoring the market. This can provide a more stable and predictable source of income, as swing trades are not subject to the same level of volatility as day trades. Swing traders can also take a more patient approach to trading, waiting for the right opportunities to present themselves rather than feeling pressured to make trades throughout the day.

This flexibility can be especially beneficial for traders who have other commitments or responsibilities outside of trading. For example, if you have a full-time job or other obligations during the day, swing trading can provide an opportunity to participate in the market during your free time.

Drawbacks of Swing Trading

While swing trading’s longer timeline does provide a number of benefits, it also has drawbacks that investors need to consider, especially when switching from day trading to swing trading. 

• Risk of longer holding periods: One of the key drawbacks of swing trading is holding period risk. Since swing trades are held for several days to weeks, traders are exposed to the risk of sudden market movements. Market events such as unexpected news announcements, geopolitical tensions or changes in interest rates can all impact the market and cause price movements that may be unfavorable for traders. If you aren’t actively monitoring your investments, this factor can result in sharp, unanticipated and avoidable losses. 
• Market volatility: Swing trading can be challenging during periods of high market volatility, as sudden price movements can result in significant losses. Unlike long-term investors, swing traders are still exposed to some of the same short-term risks associated with volatile stocks suitable for use in swing trading strategies. When combined with the overnight risk, swing trading may be riskier than it initially appears. 
• Account limitations: Like day traders, swing traders cannot use tax-advantaged accounts like 401(k)s or IRAs as their primary brokerage platform. This limitation can lead to opportunity costs when it comes to saving on taxes. 

Swing Trading vs. Day Trading

If you’re a new investor looking to start short-term trading for the first time, Benzinga recommends that you begin by learning more about swing trading. Swing trading has a longer investment timeline, which puts less psychological pressure on the trader and affords more time for research. Swing trading strategies also help you avoid being designated as a pattern day trader, which is more likely to mean restrictions as a newer investor. 

Compare Swing Trading Brokerage Accounts

The right broker is a crucial element of any successful swing trading strategy. Benzinga offers insights and reviews on the following brokerage account providers. If you don’t already have a short-term trading brokerage account, consider continuing your research with the links below. 

Frequently Asked Questions