Short term-trading strategies allow traders to make huge profits from small market movements. If you’re a beginner trader looking for the most productive and the best short-term trading strategies, you’ve come to the right place.
In this article, you’ll learn about short-term trading, the best strategies to use in short-term trading, the best short-term trading markets, and popular short-term trading indicators.
What is Short-Term Trading?
Short-term trading refers to a trading strategy that involves taking or holding a position that can last for a short time frame, usually a few days, weeks, or even less.
This trading strategy can also replace the standard buy-and-hold approach, seeking to profit from short-term trends and minor price changes.
Generally, short-term trading has more risks than typical investing strategies. Because this strategy seeks to profit from quick market price changes, it searches for market volatility around critical economic data releases, political events, or corporate earnings.
Short-term trading is also known as active trading. Traders who use this strategy are mostly indexed or passive investors.
Best Short Term Trading Strategies
A trading strategy refers to the methodologies that traders apply to determine high-profit market entry and exits. These strategies help traders know when and where it is best to trade.
Active trading usually involves several methods, each having its ideal market environment and potential risks. Some of the best short term trading strategies that exist include:
- Day Trading
- Swing Trading.
Scalping is by far one of the fastest trading strategies among active traders. These traders benefit from small price movements by holding positions that can last between seconds and minutes.
Scalping involves finding and taking advantage of bid-ask spreads that appear larger or narrower than usual due to transitory supply and demand mismatches.
A scalper’s goal is to earn modest gains as often as possible by making a transaction and leaving it as soon as the market swings in its favor. In other words, scalpers don’t try to make big volume transactions or exploit significant market swings.
Scalpers often consider that the profit they’ll make for each trade is small, compared to many other trading strategies; hence, they invest in markets with high liquidity levels to ensure they’re frequently trading.
Another known fact about scalping is that it’s not meant for part-time traders because it requires a significant amount of time. The strategy also requires the highest level of discipline.
Scalpers that hope to benefit from the market must rigidly stick to this strategy to avoid making a loss that can eat into all the earnings they’ve made from several successful trades.
The most popular short-term trading technique in any financial market is probably day trading. As the name implies, day trading involves buying and selling multiple assets throughout the day. Day traders often close out positions within the same day to avoid overnight fees.
By trading throughout the day, day traders attempt to benefit from small market changes. These traders need to make swift choices to enter and exit transactions efficiently and quickly.
Initially, day trading was not for beginner traders but the professionals like market makers or specialists. Nowadays, the advent of electronic trading has made this strategy accessible to newbies.
Day trading strikes a compromise between the extreme short-term trading strategies like scalping and mid-term strategy like swing trading. To determine whether to purchase or sell a financial instrument, these traders use hourly charts to analyze price data and identify recent developing or decreasing patterns.
Day Trading Requires an Exit Strategy
Day traders are always carefully monitoring the market. Once they notice that a particular position is going the wrong way, they immediately exit that position to prevent losing money.
Every trading day comes with significant volatilities that can either produce a favorable trading environment or create risks that every trader should pay attention to. Since day trading involves a more extended trading period than scalping, the risk is lesser.
Day traders can create an effective trading strategy by carefully analyzing the previous day’s charts, mainly its highs and lows. Overnight positions usually face the risk of price chart slippage and gapping, but traders can avoid that using day trading.
Day trading strategies are usually more productive in volatile markets like oil trading.
As opposed to scalping, swing trading typically deals with taking a position for a more extended period, usually several days or weeks, within a more significant market price change. Traders often consider this strategy as a short- to medium-term trading strategy.
While swing trading still falls under short-term trading strategies, it doesn’t have a limited or specific time frame. Hence, because it could last for several weeks, many consider swing trading as a long-term trading strategy.
As you’d guess, this strategy involves several predictions and proactive thinking. Swing traders critically study the swinging pattern of an asset’s price using technical analysis to see if it has future profit potentials.
These predictions are to determine how the price will move before holding a position. Once the price position changes from what it used to be, traders may choose to close it.
Scalping and day trading often use price action and technical analysis, but swing trading combines fundamental and technical analysis. These trading algorithms assist traders in deciding when to buy or sell an asset.
Although swing trading does not depend on a perfect price movement prediction, it relies on a unidirectional market. Swingers will be putting themselves at risk if the market keeps moving sideways or is range-bound.
Other Short-term Trading Strategies
Some of the other popular short-term trading strategies include:
- Reversal Trading
- Momentum Trading
- Range-Bound Trading
- Breakout Trading
In reversal trading, the traders base their transactions on when a particular trend changes direction. Reversal trading is simply a change in an asset’s price, but the difference in direction can either be upside or downside. In other words, a reversal occurs when an uptrend shifts focus to a downtrend and vice versa.
Experienced short-term traders can benefit from sudden price reversal to make quick profits by identifying a reasonable price level. These traders use indicators like channels, oscillators, or moving averages to spot reversals and isolate trends.
Reversal trading is common during day trading, but you can also apply it to medium-term strategies like swing trading. However, long-term traders focus on reversals on weekly charts rather than taking advantage of price changes within a 10-minute chart.
Momentum trading focuses on spotting and taking advantage of market volatility. Traders buy positions when a stock goes high and sell once there’s an indication that it’s going down. Therefore, some people refer to this trading strategy as more of a reaction than a strategy.
A market that’s going upward will attract more market traders, which may cause the price to increase. In contrast, a fall in market price discourages market players, thereby causing a price decrease.
You’ll need to apply advanced risk management practices to manage hidden traps, overcrowding, and market volatility to avoid a reduction in profit. Market participants frequently disregard these principles, misled by the overpowering dread that they may miss the selloff while everyone else gains handsomely.
Range trading is an active trading strategy that seeks to identify the most favorable range for traders to make the most profit within a short period of buying and selling an asset. This strategy is better suited for short-term trading since traders look for small price movements rather than massive changes.
Long-term traders often consider range trading to be a boring strategy. They open and hold a position at a specific support level while monitoring when it will hit the resistance level.
You can apply range trading in stocks, bonds, ETFs, closed-end funds, and more. However, you must be aware that range trading often requires accurate market timing, such as the specific period when an asset is likely to trade between two prices.
If your market timing is not precise and the price moves away from the direction you anticipated, you’re at significant risk of incurring losses.
Since range trading seeks to recognize basic price levels, you’ll need to apply technical analysis techniques like support and resistance, moving averages, and volume trends.
While range trading seeks to base trading decisions within a price range, breakout trading aims to identify the points when an asset’s price moves outside a price range or resistance level. This strategy is common among day traders and swing traders.
Breakout trading usually comes with increased volume or starts with market price change catalysts such as news stories. Breakout trading aims to recognize a productive market setup and ride the trend from the time the breakout begins to break out of the price range or resistance and create new highs.
Once you identify signs of a breakout, you can use charts to learn the pattern and determine the best entry and exit points. Ensure that your trading plan includes a well-defined trading goal and an entry and exit strategy.
Best Markets for Short-Term Trading
You can use short-term trading in various markets. However, your choice of a trading strategy will affect how long you can keep a position open. Also, your choice depends on your interests and personal preferences. Some of the most known short-term markets include:
The Foreign Exchange (or Forex) market is available for trading 24 hours of five days a week. The market has vast currency pairs, making it the most popular short-term trading market.
The forex market is volatile, allowing short-term traders to take advantage of the continuous price movements in forex pairs. From its volatility, forex is a highly liquid market that short-term traders can enter and exit quickly.
Short-term forex traders usually do not hold positions for more than a day unless they don’t mind paying a rollover fee.
Share trading is another market that you can take advantage of as a short-term trader. The market has several options across stock markets worldwide.
The best short-term trading strategies to use in the stock market are the day trading strategies which allow you to close trades at the end of the day, or swing trading, which will enable you to hold a position for more than a day.
The stock market has restrictions on trading hours, and there’s usually less volatility when you trade outside those hours.
Indices trading works in similar ways to the stock market in that its trading hours are also restricted. The best short-term trading strategy to adopt for indices trading is day trading or more extended swing trading.
Indices trading involves trading multiple stocks from various companies, making you eligible for more market exposures.
Cryptocurrencies are volatile commodities, and the market is open 24/7 for both short- and long-term traders. As a trader, it is essential to critically study the market and understand crypto-assets, especially since it’s still relatively new compared to other markets.
Commodities trading works in similar ways as shares and indices as you’ll also need to pay an overnight or rollover fee if you allow the positions you’re holding to roll over to the next day. You can apply short-term strategies on assets like silver, gold, sugar, and wheat with commodities trading.
How to Start Short-Term Trading
The steps below will help you set up short-term trading:
- Decide on the type of trader you want to be. As a short-term trader, you can either be a scalper, swing trader, or day trader.
- Study the available markets for short-term trading. Available options include shares, indices, cryptocurrencies, commodities, and forex.
- Choose the best short-term trading strategies that fit the type of trader you’ve decided to be. These strategies include scalping, day trading, and swing trading. You can also adopt other short-term trading strategies like reversals, momentum, or breakout trading.
- Open a trading account. Once you open a live trading account, you’ll have access to a demo account where you can practice short-term trade using virtual funds. Please, ensure you dedicate enough time to learning and practicing short-term trade on your demo account before going live.
Short-term Trading Technical Indicators
Technical indicators for short-term trading often cover shorter timeframes and may assist traders in determining entry and exit points.
Short-term traders often use moving averages to determine whether an asset’s price is trending upward or downward and make critical investment decisions. Simple moving averages (or SMA) use a short-term trend of 15 – 20 days, while the most common longer timeframe is 200 days.
Moving averages are good short-term indicators because they focus more on trend following. For instance, exponential moving averages (EMAs) and SMA are excellent lagging indicators, meaning that these indicators will only react when there’s a price movement.
Relative Strength Index (RSI)
RSIs help traders spot oversold or overbought security levels by comparing their strength and weeks to other assets on the market. The RSI is an oscillator that displays like an underlay indicator, producing readings between zero to one hundred.
Generally, when the RSI reading goes beyond 70, the asset is overbought, and when it goes below 30, it is oversold. Short-term traders can also benefit from the RSI’s ability to identify buy-and-sell signals, particularly for those looking for failure swings, centerline crossovers, and divergence on trading charts.
Unlike the moving averages, RSI changes direction before a price change occurs. Therefore, short-term traders can receive an early warning to exit a transaction before a price reversal happens.
A stochastic oscillator is a form of momentum indicator for generating oversold and overbought signals. This indicator compares an asset’s closing price to its price range during specific periods. Traders also use it to create oversold and overbought trading signals with a reading range of 0 – 100.
When the stochastic oscillator reading crosses 80, it shows that the asset is overbought, which may encourage a trader to sell. When the reading falls below 20, the investment is oversold, and traders may buy at this point.
Frequently Asked Questions
Several questions are surrounding short-term trading and the best short-term trading strategies, especially among beginners. Some are unsure of its safety, scalability, profitability, or how it works. Some of the frequently asked questions include:
How Is Short-Term Trading Different from Long-term Trading?
Both short- and long-term trading have the same objectives: profit-making. The only notable differences between them are the trading duration and strategies.
Short-term traders usually last between a few seconds to a few days and do not exceed a few weeks. However, long-term trades can last for several months and even years.
Short-term trading strategies include scalping, day trading, momentum trading, swing trading, etc. On the other hand, long-term trading strategies include position trading.
Are Short-Term Trading Strategies Effective?
Yes, short-term trading strategies are effective. If you know what you’re doing, you’ll profit massively from short-term trading using any of the strategies we’ve discussed above. Usually, you might need to test each strategy on a demo account to identify which one works for you.
There is no one-size-fits-all strategy that works for all financial markets, which means that you’ll have to choose the best short-term trading strategies that work best with the market you’re trading in.
While selecting a trading strategy, ensure that you choose one that will give you a better chance of making the most profit from the market.