Trading Styles Explained: Day, Swing, Position and Long-Term

A day trader, in the words of the US Commodity Futures Trading Commission (CFTC), “takes positions and then offsets them during the same trading session prior to the close of trading.” FINRA, which oversees US brokers, says frequent intraday traders “might attempt to profit from small price movements, typically related to volatile stocks,” and often trade on margin.

Closing out every day avoids holding a position overnight. The price is intensity and cost. The US Securities and Exchange Commission (SEC) calls day trading “an extremely stressful and expensive full-time job” and warns: “Be prepared to suffer severe financial losses.” FINRA adds that frequent trading “can also come with higher costs that might erode your returns.”

Swing trading sits in between. Fidelity’s learning center describes it as trying to profit from market swings “of a minimum of 1 day and as long as several weeks.”

That means holding positions overnight, while news can arrive and the market is closed. The SEC notes that true day traders do not own stocks overnight “because of the extreme risk that prices will change radically.” A swing trader accepts that risk in exchange for fewer decisions and less time at the screen.

A stop order does not remove the risk. It becomes a market order once its price is reached, the CFTC explains, so a market that opens beyond the stop fills it at the price available then.

A position trader, in the CFTC’s glossary, “either buys or sells contracts and holds them for an extended period of time”, as distinguished from a day trader. The aim is a larger move, and the trade-off is more room for the market to move against the position before the plan calls it wrong.

For leveraged positions, time adds a risk of its own. The risk disclosure the CFTC requires for futures customers warns that if the market moves against a position, “you may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice.”

At the far end is the investor who holds for years. The SEC calls this the time horizon: “the expected number of months, years, or decades you will be investing to achieve a particular financial goal.”

An investor with a longer time horizon, the SEC says, may be more comfortable with a more volatile investment “because he or she can wait out slow economic cycles and the inevitable ups and downs of our markets.” Waiting is still a risk to be planned for: the S&P 500 fell 57% from 2007 to 2009, and a long-term plan has to survive falls like that.

The time frames differ. The questions do not. Every style needs the same answers, decided before the trade:

• Entry: what has to be true before a position is opened.
• Exit: where the idea is proven wrong, and where it has done its job.
• Size: how much of the account one position may put at risk.
• Costs: commissions, fees and other trading costs, which FINRA says rise with frequent trading.
• Review: how each trade is recorded and checked against the plan.

A time frame without these answers is not a strategy, however short or long it is.

• Time: day trading needs the session itself. Longer styles need less screen time and more patience.
• Temperament: some people find quick decisions easy, others find waiting easy. Both are tested when a position moves against them.
• Capital: FINRA says frequent intraday trading should never be funded with essential assets. The same caution applies to money needed for living costs in any style.
• Leverage: borrowed money enlarges results in both directions. In the words of Ontario’s securities regulator, “if things don’t work out, you will have bigger losses.”

A trading style is a choice of time frame, not a strategy, and it does not change the arithmetic of risk. Whatever the time frame, what decides the result is the same: a tested method, a defined risk on every position, and the discipline to follow both.

A written system can work on any of these time frames. Without one, no time frame helps.

Your results will depend on your own decisions, your capital and market conditions, and you can lose money.