Retail traders prefer short-term trading strategies, and one of the reasons is the instant gratification they receive. It’s a great option for impatient investors that can’t wait for a prolonged period before they see a profit. And short-term trading makes it possible for them to work in short timeframes.
The concept is of position trading, and the idea with the strategy is to benefit from small price movements in the market, by opening and closing positions in a relatively short period, usually days, and sometimes weeks.
It is a speculative technique of trading in the stock market when compared with other more traditional methods.
There are several methods of short-term trading, and some include swing trading, intraday, and scalping. It’s possible to use almost any online trading platform for short-term trading, yet there are certain risks involved and expenses.
Also read: What Is Position Trading
- How Short is Short-Term Trading?
- Long-Term Trading vs Short-Term Trading
- Can You Profit from Short-Term Trading?
- Types of Short-Term Trading Strategies
- Markets for Short-Term Trading Strategy
- Short-Term Trend Trading
- Short-Term Trend Trading Tips
- Reasons to Avoid Short Term Trading
How Short is Short-Term Trading?
Taking a position with the strategy can last a few seconds or multiple days. The important thing about the strategy is the focus on price action, instead of the asset’s long-term fundamentals.
Investors that implement this method of trading are attempting to profit from market volatility. It can result as a product of political instability or economic data that is showing information about companies’ quarterly earnings.
Short-term trading is a form of active trading, unlike strategies that favor investing in passive funds. The whole concept gets based on speculation, and this means there is no need for purchasing and selling of given assets.
Traders that practice short-term strategies prefer derivative instruments, and with them they can enter and exit positions, and are not required to own the asset. Basically, investors make a profit by exploiting the rising and declining market prices.
Long-Term Trading vs Short-Term Trading
As mentioned previously short-term trading takes advantage of fluctuation in the price to make fast profits. The opposite is true with long-term strategies that attempt to generate a more stable revenue stream over a longer period.
Because of this short-term trading gets perceived as a speculative form of investing and not the typical buy and hold method.
Short-term trading involves derivative products, like CFDs and spread bets. Enabling investors to start a buy or sell position depending on the expectation if the price of the asset is going to rise or decline.
But also if the market direction will make it possible for you to make profits or will it result in potential losses.
Both strategies of short-term and long-term trading offer advantages in the stock markets, there are also risks.
Some investors choose the long-term buy and hold method, in this case, they pay the entire value of the position and take possession of the asset, and it can be a currency pair, commodity, share, or index.
If you prefer long-term trading, then position trading is an alternative option by relying on derivative products.
Selecting which option is the best course of action in your case, depends on several factors. Primarily the goals you have set out to achieve, and the capital at your disposal. The circumstances in which you are trading can influence the outcome of the positions.
Can You Profit from Short-Term Trading?
Timing the market is the most important factor for making profits with short-term trading. However, although this is true for financial markets in the stock market, it is different.
The best option to earn money from short-term trading is to focus your efforts on dates that correlate with key economic data releases.
In the stock market, a trader has the biggest advantages with short-term strategies when volatility is on the horizon. And he can take advantage of the situation.
Types of Short-Term Trading Strategies
Short-term traders can select from a variety of styles that get tailored for investors with different risk tolerances and time constraints.
It is probably the most attractive short-term trading strategy used for different classes of assets. Day traders purchase or sell several instruments in a day. The goal is to terminate those positions before the closing of the market.
This way they don’t retain the position during the night and avoid paying extra fees. This means that they do not carry positions overnight, in turn, avoiding overnight fees.
It is a balanced approach to short-term trading. And investors that use the method analyse hourly charts to identify trades that are declining and use the information to choose if they will purchase or sell a given financial instrument.
When they observe that the market they have selected is changing course and the expected results are not positive, the investor can prevent losses by leaving the position.
The style requires quick decision-making so investors can move in and out of trades fast and productively.
During a day trading, volatility can intensify producing favorable trading circumstances, and risks are present and have to be accounted for by traders.
Although the preferred method is for day traders to close trades at the end of the day, there are alternative techniques of short-term trading that allow positions to stay open if they believe it is necessary.
Scalpers try to generate small profits as frequently as circumstances allow by entering a trade and leaving it when the market goes in the trader’s favor and his ability to scalp profits from the top of a market trend.
When talking about the short-term, there are no shorter time frames, that dose practice in scalping. Investors try to enter and exit positions in minutes and sometimes even seconds.
The number of transactions performed in a day number in the hundreds, and the point is to generate tiny profits from each trade, that collectively will produce a bigger profit.
Investors that implement scalping strategies disregard fundamental analysis and concentrate on technical analysis and price action. Scalping gets frequently used in the forex and commodities markets.
Scalpers don’t go after every short-term trend, they need to be selective and identify which one will form before a trade gets finalized.
Because of the sheer volume of trades in a day, there is a substantial risk with using the strategy. Position may turn out to be unproductive, and although the losses are small, they can pile up with hundreds of daily trades.
Scalping is very time demanding and is not a good option for the part-time trader. Actually, most scalpers select to implement high-frequency trading (HTF) to execute a large number of orders in seconds.
Investors that want to trade in the short term, can find the style profitable but at the same time risky. The crucial thing is to know the costs you are exposing yourself to and make sure they do not affect the earnings.
Swing trading is at the border of a short to medium-term trading strategy, and investors keep the positions open for several days even weeks.
The name of the strategy reveals the concept, investors observe the asset price and check if the swing highs and lows indicate forthcoming profit.
This method demands forecasting and analysis, trying to figure out the moment a price will make a move, and taking advantage of the asset’s ups and downs. The position is closed when it becomes obvious that the pattern is no longer present in the market. It’s a useful strategy for stocks.
Swing trading takes full advantage of fundamental and technical analysis. Because traders need data on economic events, which can influence the markets, and result in the rise or decline of the position they held during the trade.
The typical approach is to concentrate on a position in a larger move that can be active for days or weeks. Within the group of short-term trading methods, swing trading is the longest style.
Although swing trading qualifies as a short-term style and gets perceived as such. There are no definitive timeframes that restrict the tactic.
Meaning it can be classified as a long-term trading style because a trend can get sustained for weeks.
Also Read: How Does Social Trading Work?
Markets for Short-Term Trading Strategy
There are multiple markets where investors can use short-term strategies. The style doesn’t impose limits on the timeframe of a position.
The final choice of a market depends on the investor’s preferences and experience.
There is a sea of shares across stock markets around the globe. The variety is what makes trading shares appealing for long-term and short-term traders.
It may seem strange for the stock markets to be on this list, because of the specific hours of trading that result in reduced volatility after normal trading periods. Yet shares are still attractive for investors looking for short-term trades.
The options here are to focus on a day trading strategy and exit the trades at the closing of every day or keep it open for several days.
A wide range of assets such as gold, wheat, and oil, can be subjected to shorter-term trading. Trading commodities is similar to trading indices, from the aspect that investors need to pay a fee to keep positions overnight.
The most popular option for short-term trading is the Forex market. The reason is the large number of currency pairs that can get traded non-stop. Basically 24 hours a day for the entire workweek.
Another important parameter is the high volatility that is characteristic of the market. This opens many options for short but also long forex pairs. Because of the liquidity of the market, it’s very practical for opening and leaving positions.
When using a short-term strategy in the Forex market keeping a position open for a longer period will produce a rollover fee for the activity.
If on the lookout for trading opportunities, the cryptocurrency market is a treasure trove for short-term traders, being open 24 hours a day, for 7 days in the week.
The key reason is the volatility of cryptocurrencies which inspires interest in market movements that can get exploited by traders.
But responsible investors know that like with any other market it’s crucial to have an appropriate risk-management strategy before initiating transactions.
Especially when considering that the cryptocurrency market is relatively new. It’s important to have sufficient info about the asset that gets planned for trading.
The limitation of market hours results in indices following a similar pattern to share trading. This opens a couple of choices to use a day trading style or keep the position open for days.
Indices trading comes down to speculating about the number of various companies’ shares and not an individual stock.
This way investors achieve greater exposure to the market. Still, many factors can influence the position, and traders need to take account of that.
Short-Term Trend Trading
Trend trading can get used on short-term and long-term strategies. For short-term cases, the methods concentrate on trends that form on price charts in minutes, alternatively in hours, and sometimes days. Yet it cannot go over this time frame.
A short-term trend gets based on the prediction that the price of an asset will stay on the course and will not change its direction in the position is opened. Investors will search to purchase an asset when they spot an upward trend. Alternatively they can sell the asset when a downward trend is forming.
Short-Term Trading Tips
There are several recommended tips that investors that own trading business plan can use to get the most out of a strategy. Every stock market covers similar trading areas and the tips can get applied to most situations.
Analyze charts. Patterns can get used to forecast price movement that can emerge in the following days.
Identify the most opportune time of the day. Strategies vary, and learning when the market is liquid is a priority. Traders can modify timeframe settings on the charts to indicate previous different timeframes.
Search for slippage. Because of the high speed of trades, an order may get executed not at the desirable price, but at a new price that emerges in the meantime. Because of this limit ordersare practical.
Risk-management. Short-term investors select to position stop-loss within ten percent of the position where a buy or sell order is made. With this option, losses are balanced and will not surpass profits, but this cannot be guaranteed.
Train with a demo account. Before committing capital to a short-term trading strategy, it is smart to practice with a demo account that’s offered on most platforms and use virtual funds. If you want to expand your knowledge about short-term stock trading then you can read the book Short term Trading in the New Stock Market, Toni Turner is the author. The pieces of advice about the stock market Toni mentioned are valuable.
Reasons to Avoid Short Term Trading
The big question is how profitable is short-term trading in stock markets, and should investors attempt to implement the strategy?
Few concepts have to be understood and perfected for profitable short-term trading. Learning the fundamentals can be a factor in making moves that can either result in a loss or a successful trade.
Several arguments can discourage traders from using the method. We can have a look at several points.
Financial Losses: Traders choose short-term tactics in the expectation to make fast profits. Yet there is always a risky thing that will not go as planned and the result can be losses that can be substantial.
Brokerage Costs: One thing is for sure your broker will make a nice profit, irrelevant of your performance on the market. Actually, brokers frequently motivate clients to be more active and perform trades. When preparing a trading strategy it’s wise to take into account the fees that will be generated from the planned activities, and how they will impact the final potential earnings.
Software limitations: Although trading platforms offer many tools, not every application can continuously track the prices and locate gaps in the price. Traders need accurate data not rumors, it can be risky to enter the market without the proper information.
Timing is impossible: The future is unpredictable, and there is a belief that a price will always rise if the current market climate is on an uptrend. The same applies to a downtrend, in that case, investors think the price will continue to decline. Market timing is usually not productive, the best option is to use the time in the market because any time is good for investing.
Short-term trading is a great option to earn money for traders that take advantage of small price movements that usually go under the radar in the bigger perspective about a trend. And that answers the important question is short-term trading profitable?
The best tactics to capture this tiny movement and make gains from them are scalping and day trading strategies.
It’s crucial to know that short-term trading creates risks, and every cost has to get considered before starting a position.
Short-term trading gets based on different methods. And for proper application of the techniques and strategies traders have to educate themselves on how to use the available instruments for success.
With several options in the trading toolbox, the market can be maneuvered more easily by combining different trading approaches. Learning different strategies means having an option that can get tailored for individual risk appetite and tendencies.
Trading strategies aim to reduce losses and increase profits at a maximum, and the same concept is applicable for short-term trading.
What Is Best Short-Term Trading?
The best short-term strategy is day trading that is implementable for every type of asset. Day traders can purchase and sell several assets within a day striving to close the positions before the daily closing of the market.
What Is Short-term Trading Called?
Short-term trading is also called active trading and is speculative not requiring purchasing and selling of the given assets.
How do Short-Term Traders Make Money?
Traders make profits from small fluctuations in price movements during the day, buying cheap and selling when the price rises, and earning money from the difference.
How Does Short-Term Trading Work?
It works by opening a short position in cases when there is a rise in the price of a stock, and then it turns into a buy order.