Swing Trading Vs Day Trading – How Are They Different?

Active trading is all about day trading and swing trading. Both strategies aim for profits from short-term market movements, but they're not quite the same. This guide will clarify these strategies, highlighting their distinct characteristics and differences.

Swing Trading Vs Day Trading

What is Day Trading?

Day trading involves a high-speed approach. You're in the stock market to make quick trades, buying and selling all in one day.

This method focuses on leveraging small price movements in the market. You must have sharp analytical and technical skills to exploit short-term trends. Day traders aim to dodge the threat of market shifts that happen after the trading day ends. They do this by not holding any stocks overnight, avoiding unexpected losses from these after-hours changes.

Day Trading: Pros & Cons

What Does Swing Trading Mean?

In swing trading, traders hold stocks for several days or weeks to catch higher price changes. 

They don't trade as often as day traders. They handle overnight market risks, meaning they incur overnight funding charges due to holding positions for extended periods.

Swing Trading: Pros & Cons

Difference Between Day Trading and Swing Trading

Which is More Profitable: Day Trading or Swing Trading?

Profitability, in this case, depends on personal skills and market approach. Day trading can offer quick, albeit smaller, returns through frequent trading, requiring intense focus and swift decisions. Swing trading is slower but targets larger gains per trade.

Technically, both methods require a deep understanding of market dynamics and involve high risk anyway. So, the profits earned would depend on the trader's time availability, risk tolerance, and trading expertise.

How to Manage Risk 

In Day Trading

1. Stop Loss: A pre-set order to sell a stock at a specific price, limiting losses if the market turns.
2. Risk to Reward Ratio: Balancing potential loss against gain - like risking ₹1 to make ₹3 - to ensure a trade is worthwhile.
3. Demand and Supply Zones: Areas on a chart indicating where significant buying or selling has occurred, helping predict price movements.
4. Position Sizing: Deciding how much capital to invest in a trade, ensuring no single trade risks too much capital.

In Swing Trading

1. Identify the trend: Watch the general market or stock direction to guide trades.
2. Support and Resistance Levels: Know these key price points where stocks often change direction to plan trades.
3. Stick to Your Strategy: Maintain discipline by following your predetermined trading plan.
4. Trailing Stop Loss: Use this moving stop-loss order to secure gains and limit losses as prices fluctuate.

Taxation on Day Trading and Swing Trading

For day traders in India, the income tax department treats profits as equivalent to income from a business. This means these earnings are subject to taxation according to standard income tax rates. If a day trader incurs losses, they can be balanced against any other business income within that year but not against salary. Should the losses be more than other business earnings, they can be carried forward to the next eight years, helping to reduce taxable income in those years.

Swing trading has a different tax structure. Holding investments for over a year before selling? Your profits will be taxed at 10% as LTCG. And if you hold for less than a year, a 15% tax on STCG applies. Losses in swing trading are also carryovers for eight years. Traders can use these losses to adjust against short-term and long-term gains. But do remember that losses on long-term holdings can only be adjusted against long-term gains.