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Table of Contents
Meaning of Short Term Trading Strategy
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 one would 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 invested in stocks or funds.
Short term trading can be very profitable but also brings along as much risk. It’s essential that one spot good trading opportunities while properly managing one’s risks. Controlling risk is one of the most important aspects of trading if one wants to be successful in short term trading strategies. It is crucial even for long term strategies.
Types of Short Term Traders
There are a variety of different styles that short term traders can choose from, depending on their time constraints and risk appetite.
Scalp Trader
A scalper aims to capitalise on the slightest of price movements and market changes. These traders grab opportunities 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. Many scalpers choose to use high frequency trading (HFT) tools as a means of executing a number of orders very quickly. 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 one will incur for opening and closing positions.
Day Trader
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. Nowadays, trading apps play a huge role in such trading strategies.
Swing Trader
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.
Popular Short Term Trading Strategies
These are some of the popular short term trading strategies that are mentioned below:
Momentum Trade
Momentum traders focus on stocks that show significant upward or downward price fluctuations. Traders seek to follow the trend of the market and generally maintain positions for days or even weeks.
Scalping
In scalping, traders make a variety of trades during the course of a day, trying to gain from minor price changes. They keep positions open for very brief periods, usually just minutes or seconds and depend on a high volume of trading.
Breakout Trading
The traders who breakout look out for price moves that are significant usually following an interval of consolidation or trading within a range. They take positions when prices break outside of the range established and seek to take advantage of the momentum.
Reversal Trading
Reversal traders identify potential market reversals by looking for overbought and oversold situations. When the price of a stock shows indications of a reverse, they buy positions in the expectation that the price will reverse in the direction of the previous.
Range Trading
In range trading, traders look out for price levels between the support and resistance of a securities. According to the price levels, traders identify potential entry and exit points. Various factors affect the upper and lower end of the stock prices. The upper level of a stock price is called the resistance level, and the lower level is termed the support level.
Tools to Design 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. As a trader, cycles can be used to one’s advantage to determine good times to enter into long or short positions.
3. Looking for Market Trends
If the trend is negative, one might consider short selling and do minimal buying. If the trend is positive, one may want to consider buying with minimal short selling. When the overall market trend is against one’s goals, the odds of having a successful trade drop.
4. Importance of Controlling Risks
Controlling risk is one of the most important aspects of trading successfully. Short term trading involves risk, so it is essential to minimise risk and maximise return. This requires the use of sell stops or buy stops as protection from market reversals.
Points to Remember While Managing Risks
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 make a difference in trading.
This is why it is important to use a platform specifically engineered to give traders speed, stability and the affordable prices possible.
2. Slippage
Perhaps, the most significant risk caused by slow execution is slippage. This is when the price at which one’s order is executed at a price that differs from the price that one requested. It happens in fast-moving markets when one’s broker cannot place the trade quickly enough to secure the price one asked for.
Short term trading uses many methods and tools to grab opportunities. One needs to educate oneself on how to apply these tools to achieve success in trading.
Conclusion
Short term trading in the stock market offers a range of strategies for traders seeking to capitalise on short lived price movements. Each strategy comes with its unique characteristics and risk profile, catering to different trading styles and preferences.
However, it is essential to recognise that short term trading is not without its challenges. It requires a deep understanding of technical analysis, risk management, and the ability to remain disciplined amid the fast-paced nature of these strategies. Trading in such a dynamic environment requires trading knowledge and a robust platform. One can trade with short term trading strategies using the Share India trading platform. Share India’s trading app can be downloaded to trade from a smartphone.