Short-Term Trading Strategies That Work
Short-term trading is quite difficult to master. But, if you can cut through the noise and get-rich quick schemes there are large gains to be had. Usually, active management far underperforms passive management. By “active management,” I mean short-term trading. On the other hand, “passive management” means long-term investing.
Short-term trading has its place, though. If you start with a low amount, you can get some wins under your belt. But, it usually takes at least a few months to get to that point. This is where many people burn out and quit. Or, they just cannot go on because they’ve exhausted themselves financially.
You can avoid this by taking my advice below. But it also helps a lot to be using a system that works well. Because we all know that if you don’t have the right tools, you’re going to do a bad job. Check out some of the short-term trading strategies that work.
Short-Term Trading Strategies
These are some short-term trading strategies you may or may not have heard of. Some of these work better than others. But, it also depends on your skillset.
Momentum trading is a short-term trading strategy where you jump onto a stock. And that stock is picking up steam. It’s headed upwards. And, if you can get on that train while the irons are still hot, you could make some gains easily.
The thing to watch out for with this strategy is knowing when to bail. If you get out too late, you could have some losses on your hands.
Range trading is a bit different. This is when you can see the stock has been consistently trading between two prices for some time. So, pretend there is a stock that keeps fluctuating between $10 and $20. And it’s been doing this for about a year. It shows no signs of stopping, and there isn’t much news around this company, or the industry.
So, it’s likely going to keep fluctuating like this. A trader could wait for a chance to buy in around $10. Then, they’d wait for the price to near $20. And that’s when they’d buy out. It provides a chance for quick, predictable gains.
For this, though, it can be difficult to tell what effect the market will have on a stock. There are endless factors that contribute to each stock’s behavior. And that behavior could change at any time.
I often look for whether a stock has “broken out.” When using this short-term trading strategy, you’re looking at long-term momentum of the chart. This is very effective for bearish charts and bulls.
Look at the recent top price peaks. Then, make a mental or physical line that connects the main peaks. If the latest upward trend breaks above that line? It’s likely it will begin turning into a bull. It goes either way, too. You can use this to predict a bear.
And it helps to look at long-term and short-term pieces of the chart and price. If you would like a more detailed explanation, take a look here.
The Best Short-Term Trading Strategy I’ve Used That Works
All these strategies work. And all of them have their place and time. Each stock requires its own unique trading strategy. So, I don’t recommend hunting for stocks that match the strategy. I recommend hunting for great companies. Then, decide on which strategy is best.
I will tell you, though. I tend to favor the breakout method. But not alone. I like to investigate the company to see where it’s headed. Is there news surrounding the business? What about the industry?
Remember that you are buying a piece of a living, breathing thing. Pretend you’re making a long term investment. Then, you’ll choose companies you can profit from repeatedly.
Short-Term Trading Tips
- Treat all your trades as though you’re making a long term investment. This means you need to investigate the company. Treat it as purchasing a quality company. Pretend you’re going to buy the whole business. You’ll want to make sure all systems and leadership are in place.
- Make a plan for your short-term trading. Write down when you’re going to buy, and how long you’re going to hold. And write down when you’re going to sell. No matter what happens, stick to what you’ve written down. If you don’t, you’ll invite emotion in. And emotion is what will make you go belly-up.
- Figure out what the best time of day is to trade. This could be different for each day of the week. But one thing to check out is power hour.
What is Short-Term Trading Called?
- Scalping: This is ultra-short-term trading. This happens between minutes or hours.
- Day Trading: A short-term trading strategy that allows a little more time. This can happen within the day or between a few days.
- Swing Trading: This is a longer term day trading strategy. Swing trading is when a buy and sell happens in a few days or months.
- Short-Term Trading Taxes: Robinhood is a nice app to start trading on. Because you don’t have to buy full shares. And, you don’t have to pay for trading fees. Plus, they track all your trades. Including date, amount, and type of trade. This comes in real handy when tax time comes around. Otherwise, you need to keep track of all that. The IRS also taxes short-term trading strategies much different than long-term investments.
What Should Beginner Short-Term Traders Do?
If you stick to a small amount of money, you have better chances of success. Because in the beginning, you will lose money. Even with the best short-term trading strategies. It isn’t a matter of if, it’s a matter of when. And while you’re learning the ropes, you aim to make money. But, you should expect to lose some.
Let’s be honest, you should expect to lose a lot of it.
So, when you outline a smaller amount, you protect yourself from, well, yourself. Let’s say I tell myself I’m going to use $1,000 to start. My rule would be that I can’t use any more money until I make a profit. I would write it down, sign it, and stick to it.
And no matter what happened, I wouldn’t allow myself to use any more money than $1,000. To protect myself from running out, I’d start with $500 of that. So, the first thing I would do is find a great stock to trade.
Then I’d make a plan for how long to hold the trade. I’d put in about $5-$10. Then, when my plan dictates, I’d take it out. If I made money, great. If I lost money, I’d figure out why. Then, I’d reassess that company or find another one.
I would keep doing this and gradually increase my trade amounts. But only if I make profits. So, I’d learn and turn $1,000 into much more.