What is Short Term Trading?

Short term trading is a strategy used in the financial markets to make profits from small price movements over a relatively short period of time. This approach contrasts with long-term investing, where the focus is on holding assets for years to benefit from larger, more sustained price changes. Short term trading involves holding assets from a few minutes to several days, depending on the specific style of trading.

1. Overview of Short Term Trading

Short term trading encompasses several strategies, including day trading, swing trading, and momentum trading. Each of these strategies has its unique characteristics and objectives:

• Day Trading: This strategy involves buying and selling financial instruments within the same trading day. Traders aim to capitalize on short-term market fluctuations and typically close all positions by the end of the trading day to avoid overnight risk.
• Swing Trading: Swing traders hold positions for several days to weeks, aiming to profit from expected market swings. This approach relies on technical analysis and market trends to make trading decisions.
• Momentum Trading: Momentum traders focus on assets showing strong trends or momentum. They buy assets that are trending upwards and sell those trending downwards, expecting that these trends will continue.

2. Key Characteristics of Short Term Trading

Short term trading is characterized by several key elements:

• High Frequency: Short term traders execute multiple trades per day or week, seeking to profit from small price changes. This high frequency requires access to advanced trading platforms and real-time market data.
• Technical Analysis: Traders often rely on technical analysis rather than fundamental analysis. They use charts, patterns, and indicators to predict price movements and make informed trading decisions.
• Risk Management: Due to the rapid nature of short term trading, effective risk management is crucial. Traders use stop-loss orders and other techniques to protect their capital from significant losses.
• Leverage: Many short term traders use leverage to amplify their trading positions. While leverage can increase potential profits, it also magnifies the risk of losses.

3. Benefits and Drawbacks of Short Term Trading

Benefits:

• Potential for Quick Profits: Short term trading can generate profits quickly due to frequent trading and the ability to capitalize on small price movements.
• Flexibility: Traders can adjust their strategies and positions based on current market conditions, making short term trading a flexible approach.

Drawbacks:

• High Transaction Costs: Frequent trading results in higher transaction costs, including commissions and spreads. These costs can eat into profits.
• Stress and Time Commitment: Short term trading requires constant monitoring of the markets, which can be stressful and time-consuming. Traders must stay alert to market movements and news.

4. Tools and Techniques for Short Term Trading

Short term traders use various tools and techniques to enhance their trading strategies:

• Trading Platforms: Advanced trading platforms provide real-time market data, charting tools, and order execution capabilities. Popular platforms include MetaTrader 4/5, Thinkorswim, and Interactive Brokers.
• Technical Indicators: Indicators such as Moving Averages, Relative Strength Index (RSI), and Bollinger Bands help traders analyze price trends and make trading decisions.
• Chart Patterns: Recognizing chart patterns like Head and Shoulders, Double Tops, and Flags can provide insights into potential price movements and trend reversals.

5. Common Strategies in Short Term Trading

Several strategies are commonly employed in short term trading:

• Scalping: Scalpers aim to make small profits from numerous trades throughout the day. They focus on high liquidity and tight spreads to execute trades quickly and efficiently.
• Trend Following: Trend followers seek to capitalize on existing market trends by buying assets in an uptrend and selling in a downtrend. They use trend indicators and moving averages to identify trends.
• Contrarian Trading: Contrarian traders go against prevailing market trends, betting that the current trend will reverse. They look for overbought or oversold conditions as signals to enter trades.

6. Considerations for Success in Short Term Trading

To succeed in short term trading, consider the following:

• Education and Research: Continuously educate yourself about market trends, trading strategies, and technical analysis. Stay updated with financial news and market events.
• Discipline and Patience: Stick to your trading plan and avoid emotional decision-making. Discipline and patience are essential for managing trades and avoiding impulsive actions.
• Risk Management: Implement strict risk management practices, including setting stop-loss orders and limiting leverage, to protect your capital.

7. Conclusion

Short term trading offers the potential for quick profits and flexible strategies but also comes with challenges such as high transaction costs and the need for constant market monitoring. By understanding the key characteristics, benefits, drawbacks, and strategies associated with short term trading, traders can make informed decisions and enhance their chances of success in the financial markets.