Swing trading versus position trading, what are some of the key differences? Both are long-term trading approaches in some aspects but differ primarily in the required capital and experience.
Swing and position trading are the two trading styles we would consider long-term in scope compared to scalping and day trading. Of course, the latter is more extreme in being long-term while the profit realization of the former is shorter.
At their core, these are the main differences between the two methodologies having a considerable bearing on what one will ultimately choose. Each approach, as with many, has the same motivation of profit, but the manner and time to achieve this are vastly different.
No method is intrinsically better than the other since they both present their unique benefits and challenges, which this article will explore further.
What is swing trading?
Swing trading is a popularly utilized trading style seeking to capture ‘swings’ for gains lasting several days to a few weeks at the most. One of the attractions for swing trading lies in how it fits between day trading and position trading, a sweet spot between an approach that’s not too fast but not too slow either.
Virtually all swing traders will use technical analysis, whether to a small or large extent and might apply fundamental and other research to similar degrees. Time-frame wise, a swing trader tends to spend much of their time analyzing 4HR, daily, weekly, and even monthly charts to formulate trading decisions.
Another advantage of this approach is the trade frequency is somewhat rare. The average swing trader will probably execute a few positions a week or a month and look for opportunities with maximum reward potential related to the risk.
What is position trading?
We could think of position trading as a more extreme, investing-style, buy-and-hold version of swing trading where positions are held anywhere from numerous months to years. This methodology requires the most patience out of them all.
Traders typically execute positions less than ten times in a year or perhaps about once in a month. Position traders would also rely on technical analysis but are likelier to observe more advanced analysis looking at deep fundamentals and sentiment.
A position trader inspects higher time-frames starting from the daily up to the monthly.
Pros and cons of swing trading and position trading
The pros and cons of swing trading are similar and somewhat amplified. For instance, although both swing and position traders generally require less screen time, this is magnified on the latter than the former.
One crucial aspect differentiating the two is the capital requirements. While forex has provided a low barrier to entry in this regard, position traders generally should have much larger accounts since their trading frequency is a lot more limited.
Hence, these speculators will want sizable gains over the long haul, which are noticeable when they’ve deployed bigger capital in a similar vein to any other ordinary investment. Some may also argue experience is another differentiator.
Most position traders will probably have at least five years of proficiency trading the markets, having attempted probably all trading styles before settling with position trading. Such a group isn’t driven by short-term rewards and would be confident to invest a sizable chunk of their money through more of an investment than an active trading lens.
Nonetheless, let’s look at some specific factors, good and bad, for both approaches.
- Maximum profit potential: Since swing and position traders naturally have substantial profit targets, they stand the best chance at maximum gain the longer their positions run.
Also, using wider stop losses ensures they can remain in trades for long to withstand any natural fluctuations in the markets, though a position trader’s stop loss will naturally need to be bigger.
- Significantly less screen time required: Because of the seldom execution of frequency for position traders, this group of speculators requires far less time on the screen looking at charts or searching for trades.
Short-term price fluctuations which may last for some days or weeks are mostly irrelevant in position trading. Even once they have taken a trade, a position trader might not need to look at the position for weeks at a time.
Conversely, these fluctuations for a swing trader are similarly insignificant, but they are likely to immediately influence their trade management because their time horizon is nearer.
So, from this perspective, position trading is a bit more flexible than swing trading, allowing the investor to concentrate on other activities in their daily lives.
- Some chance of a positive-bearing carry swap trade: Such is the diversity of swing and position trading that some investors exclusively trade in this manner for accumulating positive swaps.
Suppose one has spotted an opportunity where the interest rate differential of the currency pair they consider trading is positive. In that case, this can be another incentive to hold the position for as long as possible to gain from the interest and potentially from the trade’s natural gain.
- Possibility for a negative-bearing carry swap trade: Conversely to the last point, the carry can equally work against an investor’s favor, providing less incentive to hold the position as it would erode the profit possibility.
- Fewer trading opportunities: This factor is another big disadvantage with swing trading and position trading to varying impacts.
Although the quantity of trades isn’t always correlated with how high a trader’s return could be, one requires much more patience than not actively trading, a trait many cannot achieve consistently.
There is generally a lot more uncertainty with swing trading and position trading as potential gains need extremely long periods to be realized, more so with the latter.
While the average swing trader may plan to hold for a few weeks, a position trader would decide over a few months at least.
The average swing trader would execute a few times weekly or monthly; their counterpart is likely to do this once every month or only a handful of times yearly.
Capital and experience are perhaps the only factors separating the two. Although a swing trader is fairly patient and has no rush of making money right now, their time horizon of holding is still within a good few weeks.
Even though this period is relatively long, it pales in comparison with a position trader’s plan for a few months or years. This fundamental shift really comes down to experience and allocating a larger trading account where even a few trades a year can produce modest to commendable returns.