Short-term trading techniques involve a combination of skills, intuition and experience from a trader. Traders make money by taking short-term positions in securities after identifying opportunities in both bullish and bear markets.
Mastering short-term trading requires certain attributes in the trader.
The following factors are essential to a short-term trading strategy to ensure that your losses are minimized while your profits are maximized.
- Risk control
The risk associated with short-term trading is commensurate with the return, ie. high risk, high reward. However, prudent risk management strategies must also be applied to short-term trading so that the trader can control the associated risk and realize the purpose of the trade in the form of capital gains.
Some of the risk control measures that short-term traders need to master include a limit or a stop order.
The limit order is an instruction given in advance for the price points where securities can be traded (purchase / sale). It is used to maximize the trader’s portfolio by ensuring that the trader takes advantage of the price points of the securities regardless of whether the price falls or rises, respectively triggering either a buy limit order or a sell limit.
On the other hand, a suspension order is an instruction given to a broker about the extent to which the investor can incur losses on a portfolio. Therefore, a stop order reduces the investor’s risk by reducing losses before or at a certain price point.
- Technical skills
Markets are characterized by recurring conditions after certain periods or during certain events. A detailed analysis of the data collected in a given market broadly shows market patterns that become predictable. Mastering short-term trading requires the capacity to identify the exact time of occurrence and the conditions / events leading to the occurrence of the expected cycle of exploitation by the trader.
The technical analysis must also be thorough enough to identify trends in the performance of the tracked security over a very short period, including a day or weeks. Having such an ability puts you in a better position to be a successful trader. The identified trends that are relied on in decision-making should have clearly recurring bottoms and breakthroughs as a sign of proper technical analysis.
Another technical tool that the trader must master is the ability to read different market data presented in different formats. For example, a short-term trader may use the moving average of a particular security to determine the best time for the price to decrease to make a call.
- Time / experience / intuition
Short-term trading is characterized by holding a position for a very short period of time, sometimes seconds, and releasing the position to make a capital gain. This requires mastery in identifying market opportunities that are driven by market dominance, especially market sentiment. However, exploiting market volatility is a risky strategy, as unforeseen events may undermine the expected outcome of the identified market opportunity.
In essence, trading is a strategy for making quick capital gains in the securities market.