Embarking on the journey of short term trading as a beginner can be both exciting and challenging. In the fast-paced world of financial markets, developing effective strategies for short term trading is essential for success. Short term trading involves making decisions within a brief timeframe, often exploiting market fluctuations for quick gains. In this realm, beginners need a solid foundation and practical strategies to navigate the complexities. Here, we explore short term trading strategies tailored for beginners, providing insights into risk management, market analysis, and decision-making to help novices embark on their trading journey with confidence.
Table of Contents
Defining 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 you’d hold a position for weeks, months or even years.
- It 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 of trading if you want to be successful in short term trading 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 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 of 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 your 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. They 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 are:
- Momentum Trading: 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 to make a profit.
- 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 Strategies
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.
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.
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.[1] When the overall market trend is against you, the odds of having a successful trade drop.
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.
Important Points to Remember
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.
Slippage
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 quickly enough to secure the price you asked for.
Conclusion
Short-term trading in stocks offers diverse strategies for capitalising on brief price movements. Each strategy, with its unique characteristics and risk profiles, caters to various trading styles. Yet, short-term trading poses challenges, demanding expertise in technical analysis, disciplined risk management, and a robust platform to navigate its fast-paced nature. Share India’s trading platform provides the tools to implement short-term trading strategies. Download the Share India trading app on your smartphone to engage in this dynamic market environment.
