What is Short Term Trading?
Short-term trading is involved with taking a position that lasts from seconds to several days. Traders can use it as a substitute for the more traditional buy-and-hold strategy, in which traders hold their positions for weeks, months, or years. On the contrary, short-term trading mainly concentrates on price action instead of the long-term fundamentals of an asset. With this trading style, traders can profit from quick market price movements because it seeks out market volatility around political events, key economic data releases, and company earnings.
Traders also know short-term trading as active trading as it is very different from passive trading. Short-term trading is usually based on speculation. So, it does not need to involve buying and selling the underlying assets. Instead, short-term traders prefer derivative assets. It means that they can enter and exit trades without owning the instrument. These include spread bets, CFDs, and options that allow traders to gain profits from rising and falling market prices.
Types of Short-Term Trades
If you are a swing trader, you have to recognize the trend to follow and trade it. It is the goal of swing trading to earn profits within 2-30 trading days. They often use daily candles for technical analysis and decide when to enter and exit in swing trading. Traders usually buy the dips in an uptrend and they sell the peak in a downtrend.
While trading, you must always remember the phrase “The trend is your friend”. You can ride the momentum of the market by trading the trend that provides an edge to traders. So, rather than swimming against the current, you can go along with it. As you must know, swimming against the current is difficult and you may end up giving up being exhausted. Keep in mind that as a trader, you must always have an edge over the market if you want to be successful. It is just like a casino that has an edge over the partners.
Scalping is a day trading strategy based on quick and short transactions. You can use this strategy to earn high profits from minor price changes. Traders who trade with this strategy are called scalpers. Scalpers are able to implement up to 200 trades per day because it is a lot easier to follow minor price moves than following large moves. The main goal of this strategy is to buy lots of securities at the bid/ask price so they can be sold at a higher price for a profit in a short time.
The important factors essential for scalping are volatility, liquidity, time frame, and risk management. Market liquidity influences the performance of scalping by traders. Some traders prefer to trade on a more liquid market where they can move in and out of large positions easily. Others may prefer a less liquid market for trading because it has larger bid-ask spreads.
When it comes to volatility, scalpers prefer stable products so they do not have to worry about sudden price changes. By trading security with a stable price, scalpers can make profits even when they set orders on the same bid and ask and make thousands of trades. The time frame in the scalping strategy is very short. The small market movements are even difficult to see on a one-minute chart but traders need to try and make a profit from these small moves.
However, while making hundreds of small profits during the active trading day, scalpers can also face hundreds of small losses that they need to avoid. Hence, it is very important to develop strict risk management so unexpected losses can be avoided.
Benefits for Beginners
Trading can be complicated for beginners. When you have just started trading, the last thing you will want is facing huge losses even before you start making profits. So, it is important to find a beneficial trading technique, and short-term trading might be just the perfect one for you, because –
- Quick Profits: You can make substantial profits within a very short period.
- Flexibility: Short-term investing provides flexibility. You will not have to wait for security to mature to get cash. On the contrary, you can sell long-term investments in the secondary market and liquidate them, but the profits you earn will be low.
- Less Risk: Short-term trading is less risky because it has substantially lower investment per transaction.
Short Term Trading Strategies
To be successful in short-term trading, these are some strategies you may follow:
Identification of the Right Trade
You need to look for trades involving minimal risk. Extensive market research is essential to identify potential candidates. To do this, you must monitor the MA of the price of a given stock over a period. You can buy a stock with an upward sloping MA, while the stocks with flattening curve or downward sloping are to be shorted. Moreover, you should monitor market cycles and trends closely. Also, keep in mind that external situations can affect stock market prices, so, take necessary measurements.
Hedging is a process where the traders look for eliminating all risks associated with an instrument. When you trade or invest in derivative financial assets like futures, swaps, and options, it allows you to insure against the risk associated with the asset.
Diversification is a method by which you can mitigate or control risk while returns are maximized. It involves a combination of various types of instruments with varying risks and returns. Keep in mind that it works only in situations where the involved assets are mutually exclusive.
Exhausted selling is a good strategy, but it is generally applied by traders that are experienced, but beginners can also go for it. You can employ this strategy in the aftermath of panic selling caused by recession alarms or any other external threat. By buying at a significantly low price, you can make a profit soon after.
If you are a beginner in trading, it is always a wise decision to try and avoid risks and play safe until you gather experience. So, short-term trading plus attentive risk management is always the best option for you.