Short-term trading strategy can be defined as taking a position that can last from a few seconds to several days. It is simply the opposite of traditional long term strategy, in which you’d hold a position for weeks, months or even years.
Short-term trading is also referred to as active trading, as the style involved differs so heavily from the strategy of staying investing in stocks or funds.
Short-term trading can be very profitable, but also brings along as much risk. It’s essential that you spot good trading opportunities, while properly managing your risks - controlling your risk is one of the most important aspects to trading if you want to be successful in short term trading strategies, for.. a long-term!
How to start short-term trading?
Choose your style of Trading:
There are a variety of different styles that short-term traders can choose from, depending on their time constraints and risk appetite.
Scalping: A scalper will aim to make small profits as frequently as possible by entering a trade and exiting it as soon as the market moves in their favour – ‘scalping’ profits off the top of a market trend. It is the complete opposite to the idea of ‘letting profits run’. These traders grab profits and cut losses as soon as possible in order to maintain a high win to loss ratio.
Scalping is incredibly time intensive and is not for the part-time trader. In fact, many scalpers choose to use high-frequency trading (HFT) tools as a means of executing a number of orders within a few seconds (and even microseconds!). For those looking to trade over the short term, this style can be lucrative but also risky. It is also important to be aware of the operational costs you will incur for opening and closing yor positions.
Day Trading: This style involves making fast decisions in order to get in and out of trades quickly and efficiently. Even within a single trading day there can be vast amounts of volatility, which is needed to create an advantageous trading environment but also create risks to be aware of.
Swing Trading: Swing traders focus on taking a position within a larger move, which could last several days or weeks. It is the longest-duration style of short-term trading, as it takes advantage of medium-term movements too.
Swing traders attempt to spot a trend and capitalise on the rises and falls within the overall price movement. They often also rely on technical analysis to identify the entry and exit points for each trade.
Tools to Help you Design Your Short Term Strategy
1. Watch Moving Averages:
A moving average is the average price of a stock over a specific period of time. The most common time frames are 15, 20, 30, 50, 100, and 200 days. The key idea is to identify the uptrend or downtrend patterns of a stock in a given time-frame.
2. Understanding cycles and patterns:
Generally, the markets trade-in cycles, which makes it important to watch the calendar at particular times. Most of the stock market gains have occurred in the November to April time frame, while during the May to October period, the averages have been relatively static. As a trader, cycles can be used to your advantage to determine good times to enter into long or short positions.
3. Looking for market trends:
If the trend is negative, you might consider shorting and do very little buying. If the trend is positive, you may want to consider buying with very little shorting. When the overall market trend is against you, the odds of having a successful trade drop.
Controlling risk is one of the most important aspects of trading successfully. Short-term trading involves risk, so it is essential to minimize risk and maximize return. This requires the use of sell stops or buy stops as protection from market reversals.
Points to remember:
1. Execution and pricing technology:
Short-term trading does have certain requirements in terms of technology due to the speed of execution that is needed to enter and exit positions quickly. In short-term strategies, fast execution can be the difference between profit and loss.
This is why it is important to use a platform specifically engineered to give you speed, stability and the best prices possible.
Perhaps the most significant risk caused by slow execution is slippage. This is when the price at which your order is executed differs from the price that you requested. It happens in fast moving markets when your broker cannot place the trade quick enough to secure the price you asked for.
Short-term trading uses many methods and tools to make money. The catch is that you need to educate yourself on how to apply the tools to achieve success.
Now that you’re armed with actionable knowledge on short term trading strategies, you can begin (or take the next step in) your trading journey with ShareIndia’s world renowned, cutting edge trading tools. Have any questions? Our team is here to help. Get your trading account here.
Disclaimer: Any Advice or information in the post is a general advice for education purpose only and is not responsible for generating any trading strategy for anyone, please do not trade or invest based solely on this information.