Financial Literacy

The Short List of Trading Strategies for Short-Term Traders

A definitive list of trading strategies would require several shelf-filling volumes. There are almost as many approaches to investing as there are traders. Chances are if you talk to five different traders, you’ll hear five different ways to make money trading stocks.

That’s part of the beauty of the stock market. It’s arguably the greatest wealth-building machine humanity has ever seen. And during the recent longest bull market in history, the folks who missed out the most were those who decided not to play.

Now that the markets have bounced back and the next bull market has reared its head, nobody with a few bucks to spare should miss out on this opportunity. The playing field has never been so level. Brokerage fees are all but a distant memory. And as we saw with the saga surrounding GameStop (NYSE: GME), it’s not just hedge funds that are profiting.

Whether you’ve got $100 or $100,000 to invest, a brokerage account and a strategy are all you need to start putting your money to work. By doing so, you’ll have a good chance at outperforming the lowly interest rates provided by most savings accounts. If you haven’t already, it’s high time you pick a strategy and start your journey toward financial freedom.

Graph showing the list of trading strategies

An Introduction to Trading Strategies

Any investment strategy worth its salt involves careful consideration of a few different elements. For starters, you’re going to need to know…

  • How much you’re willing to invest
  • What direction you think the security you’ve targeted is heading price-wise
  • How you plan to exit your trade.

Those bullet points are the foundation that the easiest and most complicated trading strategies are built on. Once you’ve figured out these three elements, the rest is easy. The downfall is that all three can be surprisingly difficult. That’s why good investors look beyond the foundation. And that’s where our list of trading strategies comes into play.

The Quick List of Trading Strategies for Short-term Investors:

  • Day Trading
  • Position Trading
  • Scalping
  • Swing Trading
  • Momentum Trading

Over the past 140 years, U.S. stocks have averaged 10-year returns of 9.2%, according to data compiled by Goldman Sachs. The S&P 500 has performed even better, with an average annual return of 13.6%.

Long-term investors looking for steady returns like these need look no further than the likes of the Vanguard 500 Index Fund ETF (NYSE: VOO) or SPDR S&P 500 ETF Trust (NYSE: SPY). They’re both perfectly fine ways to grow a nest egg. But what long-term investing has in security, it lacks in ability to grow capital quickly. Annualized returns of 13.6% are great and all. But grabbing those kind of gains on a daily or weekly basis can offer the boost a portfolio needs to go from ordinary to extraordinary.

Day Trading

Day trading isn’t for the meek. It’s a fast-paced full-time job (for most) that comes with equal parts risk and reward. On top of the risks and rewards, there are also several rules to be aware of.

Day trading can be summed up as the act of getting in and out of an investment in a single day. A reason to day trade would be anticipating that a company is about to break out.

Let’s say BioNano Genomics (Nasdaq: BNGO) is having its earnings call while the markets are open. The stock has been fairly quiet, but based on the company’s recent product rollout, you’re expecting it to beat estimates. You pick up a few hundred shares in the morning. Your intuition proves correct. After the earnings call, share value spikes, and you sell before the end of the day… pocketing a healthy gain along the way. And by getting out of the position at the end of the day, you’re protected from any after-hours fluctuations. That’s a straightforward example of day trading.

Day trading has been growing in popularity, thanks in part to vanishing brokerage fees. That’s why it tops our list of trading strategies for short-term traders. But this is just the tip of the trading iceberg. Day traders can rely on anything from a hunch to complicated chart patterns to find their next trade. In fact, this strategy has many underlying strategies of its own to consider.

Position Trading

This may be one of the more controversial items on our list of trading strategies for short-term traders. That’s because from some vantage points, position trading is a buy-and-hold, long-term strategy. But in reality, it can be quite effectual as a short-term strategy.

Position trading is all about trends. Many position traders will look at charts to try and figure out securities in terms of value. And more active traders can use those charts to find and assess positions that have the best movement to take advantage of.

For instance, position traders can look to something as simple as a string of higher highs (or lower lows) as a budding trend. Once established, that trend can become an actionable series of events. If a given stock is on the way up, an investor can see that as a time to invest and ride the upward wave. One of the keys to using this strategy is for investors to pay close attention to (and adjust) their trailing stops.

If a stock you’ve invested in is trending upward nicely, a near-constant adjustment of the trailing stop can be extremely useful. For every 5% a stock moves upward to new highs, adjusting the trailing stop at the same rate can help maximize profits… and minimize losses. And that makes this one of the more effective trading methods on our list of trading strategies.

Scalping

This one is all about speed… and to a lesser extent, volume. A key to using this strategy to your advantage is understanding the difference between the bid-ask spread and knowing how to use limit orders.

Once you’ve gotten these basics down, the simplest explanation is that this strategy focuses on buying a security at the bid price and quickly selling it at the ask price. On some securities, the spread between the bid and ask prices can be pretty big. But when it comes to scalping, it’s important not to focus on the spread too much. Liquidity can be even more important.

If the spread on a security is too large and there isn’t much liquidity, it can hamper the ability to sell. If there are no buyers at the ask price, the scalping strategy falls apart. But here’s how it can work properly… and lead to profits in a matter of minutes.

Let’s say you log in to your brokerage account and find that a stock’s bid price is $20 and its ask price is $21. The liquidity is high enough that is looks like filling a limit order shouldn’t be a problem. So you place a limit order for 100 shares at $20. The order is filled, and just like that you’ve got $2,000 worth of stocks. Once confirmation comes through and the stock is on your position, you can do whatever you want with it… including selling it.

If the ask price is still at $21 once you’ve got ownership, you can sell the stock you just bought with a limit order of $21. And if it goes through, boom! You just scored $100 in a matter of minutes.

If the bid-ask spread is larger than a dollar, it can lead to even larger short-term gains. But just be mindful of liquidity. If there’s not enough interest on both sides of the trade, it can lead to holding positions longer than anticipated.

Swing Trading

Like most short-term trading strategies, swing trading relies on trends. But the benefit of this style of investing is that you don’t have to be glued to a screen all day, monitoring every up and down in the markets. But you do need to pay attention. While day trading can be a full-time job, swing trading is more akin to a passionate part-time job.

Entries or exits from a position can happen at any time. And often, this necessitates a lot of technical analysis. Additionally, it can call for the use of quantitative tools to trigger trades. And holding times can be anywhere from a couple of days to a few weeks… It just depends on what and where the markets are moving.

When done right, a swing trader can seize short- or medium-term gains by following a stock’s (or any financial instrument’s) up-and-down routine. In other words, it boils down to playing off swings in price that follow a pattern of some sort.

When they do this well, swing traders can predict the likely short-term direction a stock’s price is heading and profit on it. And that’s the case no matter which direction it looks like it’s going.

If the patterns analyzed indicate a bullish direction, the swing trader will take a “long” position. This can be as simple as buying shares of a common stock, picking up some call options or buying futures contracts.

On the other hand, if a swing trader sees a bearish pattern, they can take a “short” position. This can amount to shorting a stock, buying short futures contracts or buying put options. If the price continues its downward trajectory, any of these can turn a healthy short-term profit.

As our own swing trading expert Nicholas Vardy shared, “Understanding Mr. Market’s irrational mood swings gave [Warren] Buffett a massive edge in timing his investments.” And being able to spot and act upon irrationality can provide a major leg up on the competition. That’s why swing trading is in a prominent place on our list of trading strategies for short-term traders.

Momentum Trading

Speaking of trends, momentum trading is the clearest (and possibly most straightforward) example of using them to your advantage on this list of trading strategies. And its beauty doesn’t lie only in its simplicity, but also in its efficacy. Studies have proven time and again that momentum stocks tend to outperform the broader markets.

When the market starts to rise, it tends to keep going in that direction. When it begins to fall, same story. It turns out Newton’s first law of motion also applies to the stock market.

The problem with this strategy is that it can involve buying a stock at or near its high price point. If momentum is pushing the price of a stock consistently upwards, that can scare off investors. However, if that stock has momentum on its side, the latest high could prove to be next year’s low.

The other difficulty with momentum trading is that the “push” behind a given stock can change on a dime. Naturally, that means a successful momentum trader will have to spend a lot of time in front of their monitor tracking a stock’s movement. And determining the difference between a fluke and momentum takes some practice.

Strong sales and earnings growth. Quality management. Share buybacks and institutional support. Each of these can be the vital difference between a fluke and actual momentum.

As Chief Investment Expert (and momentum advocate) Alexander Green wrote, momentum stocks can be seen as those that lead the market in both profit growth and price action. And the thing that powers them higher? Innovation. Leaders in a sector that are currying the favor of institutional investors are almost certainly making our lives easier, longer, healthier, safer and richer. And that right there is momentum worth investing in.

The Bottom Line on Our List of Trading Strategies for Short-Term Traders

This isn’t anywhere near a comprehensive list. But all five of these strategies are proven winners… when properly executed. But that can be a major hang-up – especially for new investors.

If you’re new to the investment world, we suggest signing up for our Trade of the Day e-letter to help get a better grasp on how to profit off of short-term movements in the market… and start cashing in on them.


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