Becoming a prop trader can be thrilling, but also daunting. One of the most important choices that all new traders have to make is deciding between day trading and swing trading. Both options are viable and have the potential to generate profits, but they come with their own challenges and risks.
In order to learn how to trade forex as a beginner, it is important to understand the differences between these two styles of trading. Proprietary firms assess traders differently based on which trading method they prefer. Regardless of your objective to pass the challenge test or manage a forex funded account, you will benefit from making the right choice.
What Is Day Trading?
Day trading refers to opening and closing trades in one day. Overnight holding of trade positions is not allowed in day trading. The trader will seek to make profits out of price changes in forex market.
This method is popular among prop traders since it helps them eliminate the dangers of overnight markets and take advantage of opportunities that happen during busy trading sessions such as London and New York.
Characteristics of Day Trading
- Trades are exited after few hours/minutes
- Constant observation of charts is required
- It is characterized by short-term price action
- Use of small stops is common
- High frequency of trades per day
A beginner in forex trading might find this technique appealing due to the fast-paced nature of trades.
Swing Trading Definition
Swing trading is a type of trading that involves holding trades open for a few days or even weeks. The focus in swing trading is not on short-term changes but rather on bigger changes.
This form of trading may suit those individuals who are unable to spend all day at their desks.
Characteristics of Swing Trading
- Trades held open for a few days or weeks
- Screen time is reduced
- Focused on bigger market trends
- Higher stop-loss levels
- Not many trades are executed
The majority of novice traders that are trying to build a funded account in forex use swing trading due to the stress involved with day trading.
Differences between Day Trading and Swing Trading
Trade Period
The key point that separates day trading from swing trading is trade period.
Day Trading
Involves opening and closing of trade positions on the same day.
Involves constant monitoring while trading session is on-going.
Swing Trading
- Involves keeping open trade positions for several days.
- Involves checking charts less often than in day trading.
If you are considering starting forex trading while working or learning, perhaps swing trading is a better option.
Profitability
Both styles can be profitable, although the sources of profit are different.
Day Traders
In the case of day traders, the profit is usually made on many smaller deals. Day traders might make several deals per day.
Swing Traders
The goal of swing traders is to earn through bigger market movements. One successful deal may result in profits equivalent to many deals.
If you are offered a forex trading platform with funding by a prop firm, then such companies would value stability more than trading activity.
Stress Level
Day trading is more stressful due to the rapid decision-making process.
Swing trading is not that stressful and allows traders to calmly think over their positions.
Managing emotions is one of the most challenging aspects for beginner traders to learn forex trading.
Advantages of Day Trading for Novice Prop Traders
No Risk of Overnight Events
Day traders ensure that they exit their positions before markets close. In doing so, they avoid overnight events that could adversely affect their trade.
This is an important consideration for prop firm traders who may face violations of risk management limits with forex funds.
Many More Trading Opportunities
Day traders have many more trading opportunities since they operate in active markets. As a result, they have ample opportunities to get experience in a relatively short time period.
Faster Learning Curve
Because day traders have fast trade exits, they receive feedback from their trades sooner.
Disadvantages of Day Trading
Highly Emotional
Chart watching for long periods may lead to emotional stress.
Overtrading is common among new day traders who feel pressured to trade continuously.
Time Consuming
Day trading requires complete focus when the markets are open.
This might not suit individuals who have a very hectic schedule.
Higher Fees
Frequent trading translates to higher spread and commission fees.
Advantages of Swing Trading for Beginners
1. Flexible Schedules
Traders can perform technical analysis on charts whenever they have spare time, unlike other methods that require constant monitoring of the screen.
This strategy is perfect for beginners who are trying to understand the basics of forex trading but work other jobs.
2. Low Emotional Trading
Swing trading involves making fewer trading decisions than day trading, reducing the chances of emotional trading.
3. Higher Reward Opportunities
Since swing traders trade big trends in the market, they can earn big profits from profitable trades.
This strategy helps traders build a forex funded account through less trading.
Disadvantages of Swing Trading
Risk of Overnight
The risk involved in overnight trading is due to unpredictable news items and market gapping.
There can be an economic announcement that might cause prices to move in different directions.
Patience Required
Patience is a necessity in swing trading since the setup takes some time to be completed.
Many newbies find difficulty in being patient while waiting for setups or holding onto the trade for a few days.
Which Trading Style is Better for Prop Trading?
This will largely depend on the personality traits, time availability, and trading experience of the trader.
Day Trading is Preferred When:
- You like to make decisions quickly
- You like spending hours watching charts
- You are impatient when waiting for returns
- You work well under pressure
Swing Trading is Preferred When:
- You do not like a high-pressure environment
- You do not have much time to spend in front of your computer
- You are interested in analyzing market trends
- You are disciplined and patient
Risk Management for Both Methods
When choosing either strategy for trading, risk management will form the basis for future success.
Proper Position Sizing
Make sure that you never put too much money in one trade. The best professional traders rarely stake more than 1% of their account.
Use Stop-Losses
A stop-loss serves to protect the account from major losses, particularly when trading on a forex funded account.
Don't Overtrade
Many novice traders believe that increasing the number of trades will increase profit. However, having good trading signals is what counts.
Have a Trading Plan
Having a trading plan on paper is essential to avoid making irrational trading decisions.
How to Start Forex Trading Well Begins With Consistency and Risk Management.
Best Pairs in Forex Trading for Day and Swing Trades
Best Pairs for Day Trading
- EUR/USD
- GBP/USD
- USD/JPY
The listed currency pairs have high liquidity and narrow spreads in major trading hours.
Best Pairs for Swing Trading
- AUD/USD
- NZD/USD
- GBP/JPY
Such currency pairs tend to make powerful multi-day movements and form good swing trades.
Conclusion
Both day trading and swing trading can bring success to traders who join prop firms at the beginning of their journey. In general, there is no best type of trading, and you should consider your personality and preferences when choosing.
Day trading is fast-paced and provides more trades than swing trading, while the latter is more flexible and relaxing. Those who want to learn how to trade forex successfully should experiment with both approaches on a demo account.
When trying to earn money and manage a forex funded trading account, one should concentrate on patience and education.