Momentum Trading vs. Swing Trading

Understanding different investment and trading strategies is crucial to your success as an investor. There are dozens of different strategies, some of which may be more effective than others. Two approaches that look similar on the outside are momentum trading¹ and swing trading². Both are highly responsive when it comes to short-term investments. Swing trading may be more widely used than momentum trading, but each strategy has its fair share of adherents who trust its methods.

Both swing trading and momentum trading occupy the same general sphere of influence in the investment world. However, there are several distinctions between momentum trading and swing trading that differentiate the two from each other. This doesn't mean you need to choose one strategy over the other, though. In fact, you can use both to great effect as long as you know the strengths and weaknesses of both. To do so successfully, it's important to understand the similarities and differences of both momentum trading and swing trading. Here's what you need to know so you can leverage both as part of your investment strategy.

What Is Momentum Trading and Swing Trading?

Momentum trading and swing trading are short-term investment trading strategies. They're most often associated with day-trading activities. Both are concerned with making careful investments with short holding periods before selling, ostensibly at as high a profit margin as possible. The volatility of daily market fluctuations is integral to the potential for profit of both momentum trading and swing trading. While the concepts at play can theoretically be applied to longer-term investments, neither are particularly well-suited for use in short-term investing activity. 

This is, of course, why momentum trading and swing trading are both particularly well-suited to day trading. The concept of "buying winners and shorting losers" applies to both trading strategies, especially with the short-term gains and losses so prevalent in day trading. As a result, there is considerable overlap between these two investment strategies. While both of these approaches seem interrelated, there's a lot that differentiates momentum trading from swing trading. Let us examine these differences in detail.

What Are the Differences Between Momentum and Swing Trading?

One of the most notable differences between momentum trading and swing trading is the relative time frame each strategy uses. Both strategies are designed to excel in day-trading environments. However, momentum trading is, in comparison to swing trading, much more compact when it comes to trading timelines. 

In fact, the majority of momentum trading is conducted intraday, with profit targets being more modest. Holding periods are much smaller, tracking is often done minute-to-minute, and executions, confirmations and order routing is usually performed with high levels of speed and precision. Several transactions often take place on a given day. In fact, the success of momentum trading is often reliant on a high volume of very short-term trades. The speed and volume necessary for the success of momentum trading often necessitate careful and close control over investments.

Meanwhile, swing trading is characterized by the use of much wider time frames and at a slower pace. Profit targets are much higher with swing trading. Holding periods are considerably longer as well, with overnight often being the shortest. In fact, many swing trading hold times can stretch across several days or even weeks. As a result, there's much less of a focus on precision with swing trading. Having to weather larger drawdowns over extended patterns is also common with swing trading, making it a more passive type of investment in comparison. While you must monitor your investments carefully with swing trading, the amount of scrutiny necessary is much less compared to momentum trading.

How Popular are Momentum and Swing Strategies?

In many cases, investors will profess a preference for swing trading over momentum trading. The relative complexity of momentum trading, when compared to swing trading, generally means that the former has fewer adherents than the latter. Most swing traders will point to the complexity and the active nature of momentum trading as reasons that swing trading is preferable. Even when taking into account the use of automated tools to streamline the process, momentum trading is often seen as too demanding for many day traders. As a result, swing trading tends to be more popular.

However, this doesn't mean that momentum trading doesn't have its adherents. In fact, momentum trading has a history of more than 80 years as a viable strategy. Momentum trading is popular among traders with the desire to exert minute and granular control over their investment activity. This becomes even more clear when momentum traders employ careful risk-adjustment strategies that allow them to maximize their profits over a number of smaller successive transactions in a single day of trading. The smaller profit targets, and accompanying smaller loss potential, also appeal to more risk-averse day traders.

Related: Five Momentum Trading Strategies to Consider >

Benefits of Swing Trading vs. Momentum Trading

As a trading technique, swing trading offers many benefits. Several of these benefits become clear when compared to momentum trading, as the latter is more complex by an order of magnitude. Swing trading also generally requires much less direct oversight than momentum trading. This results in swing trading being more accessible to inexperienced traders or those without the resources available to them that momentum trading would demand of these traders. At the same time, swing trading often carries more risk than momentum trading because profit targets, as holding times, are much higher.

In comparison, momentum trading takes more time to master. For those who take the time to reach a deep comprehension of the techniques and tools necessary to understand momentum trading, the benefits are clear. Exerting such high control over your investment activity means quicker potential return on investment and better risk management because hold times are so comparatively brief. This limits the profitability of any one transaction but provides better opportunities for increased volume. The trade-off, of course, is an almost fanatical level of granularity. It's often this reason that leads to only the most motivated to take on momentum trading.

Successful day traders need to use all the tools at their disposal to be effective investors. Choosing the right strategies to excel in such a competitive and fast-paced environment is crucial. In many ways, it may seem that swing trading and momentum trading may be opposing investment strategies. However, because of the considerable overlap between these two day-trading approaches, using both at the same time can provide a number of advantages. An example would be using momentum trading as a hedge against the risk associated with longer-term swing trades.

Whether you're a swing trader, a momentum trader or you use aspects of both strategies in your day trading, you can always benefit from the use of rules-based logic and trading automation tools. Relying on Composer can not only save you time but also prevent you from relying on making emotional decisions that may have negative consequences. Additionally, Composer offers opportunities to backtest investment strategies to better understand your risks and potential drawdowns before investing. If you are looking to get started, read our introduction to momentum investing and why it works.