When looking at trading strategies we often distinguish between day and swing trading strategies. In this article I would like to analyze in detail the difference between the two and explain you why you need both.

Day and Swing Trading Strategy Examples

We will use two trading strategies which both trade one contract of the E-mini Dow Future (Symbol: @YM). Both are robust ones and stood the test of time. To introduce you to them, let’s first look at them in their full beauty, without any commission or slippage included. The equity curves shown below are from a back test over a 10-year period. Both strategies trade long only.

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Day Trading Strategy

YM equity curve day trading strategy
Performance Indicator Value
Total Net Profit $63,755
Profit Factor 1.42
Percent Profitable 52.32%
Ratio Avg. Win:Avg. Loss 1.28
Total Number of Trades 862
Avg. Trade Net Profit $73.96
Max. Drawdown (Trade Close to Trade Close) ($5,735)
Stop Loss ($700)
Max. Trade Drawdown ($700)

Swing Trading Strategy

YM equity curve swing trading strategy
Performance Indicator Value
Total Net Profit $90,535
Profit Factor 1.36
Percent Profitable 34.01%
Ratio Avg. Win:Avg. Loss 2.64
Total Number of Trades 591
Avg. Trade Net Profit $153.19
Max. Drawdown (Trade Close to Trade Close) ($11,200)
Stop Loss ($600)
Max. Trade Drawdown ($2.580)

Some of the differences you see here are due to the differences between day and swing trading strategies, others are just the nature of the strategy. What we can say is that in general the Total Net Profit and Avg. Trade Net Profit are higher for swing trading strategies. The Total Number of Trades on the other hand is typically higher for day trading ones. What is also clear is that the Max. Trade Drawdown is equal to the stop loss for day trading strategies and much higher than the stop loss for swing ones. Why this is the case we will discuss below more in detail.

Other things like Profit Factor, Percent Profitable or the Ratio Avg. Win:Avg. Loss do not depend on the type of strategy.

Introducing Commission and Slippage

In the next step we will include $5 commission per round-trip and 1 Tick slippage for each side, i.e. $10 for the round trip. This provides a more realistic equity curve, since most of us will have to pay such commission and get on average such a slippage.

Day Trading Strategy

YM equity curve day trading
Performance Indicator Value
Total Net Profit $50,825
Profit Factor 1.32
Percent Profitable 50.46%
Ratio Avg. Win:Avg. Loss 1.27
Total Number of Trades 862
Avg. Trade Net Profit $58.96
Max. Drawdown (Trade Close to Trade Close) ($5,900)
Stop Loss ($700)
Max. Trade Drawdown ($700)

Swing Trading Strategy

YM equity curve swing trading
Performance Indicator Value
Total Net Profit $81,670
Profit Factor 1.32
Percent Profitable 34.01%
Ratio Avg. Win:Avg. Loss 2.56
Total Number of Trades 591
Avg. Trade Net Profit $138.19
Max. Drawdown (Trade Close to Trade Close) ($11,590)
Stop Loss ($600)
Max. Trade Drawdown ($2.580)

As you can see from the tables, the day trading strategy is much more affected from the additional cost than the swing one. The Total Net Profit and Avg. Trade Net Profit go down by 20% for day trading strategies, but only by  10% for swing trading ones.

Analyzing the Trade Distribution

Next, we will look at the profit and loss distribution of both candidates. This is interesting, since many of use rely on statistics, which most often is based on the assumption of normal distributions.

Day Trading Strategy

Profit Histogram Day Trading Strategy

The profit histogram shows a nice distribution with a cut on the left side. This is the stop loss which protects us from excessive losses and is always used in our strategies.

Swing Trading Strategy

Profit Histogram Swing Trading Strategy

This profit histogram looks very different. you clearly can see the stop loss ($600) on the left and also the profit target on the right $1,600. But you can also see that there were trades which filled with higher profits and lower losses.

Day Trading Strategy

Q-Q Plot Day Trading Strategy

A Q–Q plot is a plot of the quantiles of two distributions against each other. If you want to learn more about it please check Wikipedia here.

What we can see is that we have a fat positive tail with the profit and a fat also positive tail for the losses. This is actually good news, it means that from time to time we have higher profits than a normal distribution would provide, but the losses on the other hand are smaller than with a normal distribution. Said that, that does not mean that you should not protect yourself from rare downside events, but at least on a regular basis this is the behavior of the day trading strategy.

What we also can say is that the distribution is close to a normal distribution in a big part (except the tails). This is nice because a lot of our statistics will work well.

Swing Trading Strategy

Q-Q Diagram Swing Trading Strategy

The Q-Q plot demonstrates clearly that this distribution is not even close to a normal distribution. Is this an issue? As long as you aware of that I don’t think so. It actually has some advantages on portfolio level as we will see in a minute. Before we do that, we first will look at the distribution of drawdowns.

MAE and Drawdown Distribution

To analyze the draw down we will study Maximum Adverse Execution and Drawdown Distribution plots.

Day Trading Strategy

Drawdown Histogram Day Trading Strategy

The draw down distribution does not show anything spectacular, it is a nice distribution as we would expect from a day trading strategy, since the profit and loss was in most areas close to a normal distribution. The Net Profit / Drawdown Ratio (= NP/DD) including slippage and commission is 8.6 what is typical for such strategies.

Swing Trading Strategy

Drawdown Histogram Swing Trading Strategy

Interestingly also the swing strategy shows a nice distribution of the draw down. This is an interesting result after we have seen that the distribution of profit and loss is clearly not normal. The NP/DD ratio including slippage and commission is 7.04, which is a bit below what we would typically target for. I still choose this strategy, since I wanted to have two on the same underlying market. There are other swing strategies which have much better NP/DD ratios. So, this is not an inherent difference between the day and swing trading strategies. It could have been also just the other way around.

Day Trading Strategy

MAE Day Trading Strategy

The Maximum Adverse Execution plot shows the maximum draw down that was reached by each trade on the horizontal axis and the final profit or loss on the vertical one. That the distribution of the losses (red triangles) is cut at the right side shows that we did not have any loss higher than our implemented stop loss of ($700).

Swing Trading Strategy

MAE Swing Trading Strategy

Here the Maximum Adverse Execution diagram of the swing trading strategy. You can clearly see the stop loss ($600) and also the profit target $1.600. What really is interesting is that there are profits and losses which are larger than each target. This is due to the fact that the strategy switches off profit targets and stop losses in the night. This is normal for such strategies and protects us from low volume trading and the risks associated with it. On the other hand, it increases the overall risk of the strategy, since over night bad surprises can happen.

Clearly you will have to take this into account when you determine your position sizing. I will analyze this more in detail in another article.

Benefits from Combining Day and Swing Trading

What happens, if you combine both strategies in one small portfolio. The equity of the portfolio will be the sum of the equities of each strategy which is now $132.495. What is more important is the draw down.

Portfolio Drawdown Histogram

The maximum drawdown is ($13,540). Thus, the NP/ DD ratio improved to a 9.7, which is better than the NP/DD ratio of each of the strategies.

What causes this significant improvement? In my opinion this is due the low correlation of the strategies, which can be seen in the weekly correlation plot below. A reason for this may be the very different distribution in profits.

Correlation matrix

My Conclusion

Due to the very different profit distributions of day and swing trading strategies they normally do not correlate very much. This is a big plus when building a portfolio. Thus, for me it is important to build portfolios out of day and swing trading strategies. Only this way you will achieve the smoothest possible equity curve in the long run.