Short-term trading is a technique that intends to open and close positions in a brief period, typically days or weeks, though it can be much shorter. Retail and institutional traders that want to profit from minute price changes and passing trends are particularly fond of this type of trading approach.
Generally, short-term trading is a more risky form of trading compared to conventional investment strategies. As a trader, you must be aware of the risks and benefits of every trade to be successful with this technique. You must be able to recognize attractive short-term prospects as well as know how to protect yourself.
Short-Term Trading Strategies
Short-term focused trading strategies demand more time from the trader, and there are many more trades in short-term trading. They receive more attention than those that cover longer time frames.
Scalping
Scalping is a short-term trading method in which participants seek to occupy and leave positions quickly, within seconds or minutes. Scalping techniques are used by traders who overlook all aspects of fundamental analysis in favor of price action and technical analysis. Scalpers also frequently encounter brief trends in the financial markets since they need more time to develop before a deal is closed.
As scalpers execute a far higher volume of transactions than day traders or swing traders, the risk of trading increases.
Pros of Scalping:
- Possibility of making a quick profit
- No need for fundamental analysis
- Not enough market exposure
- Small moves are common and accessible
Cons of Scalping:
- Time taking
- Requires extremely valid entry points (the price at which an asset is bought), as the price movement of just a few percent in the wrong direction would result in reaching a stop loss.
Day Trading
Day trading is the most common short-term approach that can be applied to any asset class or financial market. Day traders aim to close out positions before the market closes. Therefore, they will buy and sell various assets throughout the day. They refrain from paying overnight fees because they don't carry functions throughout the night.
Day trading balances severe short-term strategies like scalping and long-term strategies like swing trading. These traders may utilize hourly charts to examine price data, identify recent rising or falling trends, and decide whether to purchase or sell a financial item. They can rapidly abandon the position to save losses once they notice that their chosen market is going unfavorably.
Day traders can evaluate their trades more thoroughly than scalpers, marginally reducing risk. They can use price charts to determine the highs and lows from the previous trading day, which can then be used to develop a successful strategy for the current trading day. Day traders also avoid the possibility of price chart gapping and slippage, which are dangerous for any positions held overnight.
Pros of Day trading:
- Quick outcomes - Trades close within a day
- Relatively secure - Limited exposure to the market
Cons of Day trading:
- Requires proficiency with fundamental analysis and highly developed technical and analytical skills.
- Time consuming and stressful
Swing Trading
Swing trading is a short- to medium-term approach in which traders maintain open positions for several days or weeks. This is a particularly well-liked strategy for stocks. As the name suggests, traders can determine whether an asset has future potential for profit by analyzing its price's swing highs and swing lows.
This strategy requires a great deal of planning and prediction. Swing traders seek to predict the direction and timing of the price’s next move before committing to trade, and then they ride the asset’s ups and downs. They will consider closing the position only when it appears to no longer follow in the same manner.
Swing trading integrates technical and fundamental analysis, in contrast to the previous two short-term techniques, which place more of a focus on price action and technical analysis. This is because traders must be aware of economic indicators and events that may impact financial markets and cause their position to rise or fall at any time throughout the trade.
Pros of Swing trading:
- Very profitable if done correctly and under the appropriate condition
- A lot quicker than day trading and scalping
Cons of Swing trading:
- Expert technical analysis abilities mixed with fundamental analysis are required
- Risky due to the price's potential for significant changes in any direction
- The trader is subject to changes in the market overnight.
Indicators for Short-Term Trading
The list of some of the most well-liked technical indicators for day trading on short timeframes is not all-inclusive but does include some of the greatest ones.
- Moving averages
- Relative strength index
- Average true range
Moving Averages
The moving average uses the average price over a rolling number of periods to try and smooth out this price movement. The result is a smooth line overlaid on your chart and follows the candlesticks or price bars.
It is simpler to identify the market trend with the smoothed line. The movement is up when the line slopes upward and down when the line slopes downward. When a price crosses the moving average or a shorter-term moving average crosses a longer-term moving average, moving averages can also give trade signals.
Relative Strength Index
It displays as an underlay indicator and oscillates between zero and one hundred readings because it is an oscillator. The indicator's calculations compare the magnitude of "up moves" to "down moves," comparing the "relative strength" of bulls and bears.
It is frequently used for the market's overbought and oversold circumstances. It indicates that the price may be about to reverse after moving too far and too quickly. To identify the divergence between the two, traders will also examine price movements with swings in the Relative Strength Index (RSI)indicator.
Average True Range
The Average True Range can be expressed as a single number or displayed as an underlay on the chart to show how the value has changed over time. It displays the typical number of points a market has changed over a specific period. The typical setting is 14, which means that 14 measurements are made.
Conclusion
Trading in the short term can be a very effective strategy for traders to profit from minute price changes that could otherwise go overlooked from a bigger trend viewpoint. If successful, short-term strategies like day trading and scalping are particularly useful for reaping sporadic, incremental gains. But remember that starting a position in short-term trading involves additional risks and expenses that should be considered.
