3 Best Short-Term Trading Strategies
December 1, 2021
Short-term trading is a popular approach among traders of all levels. In a sense, it has a certain allure, at least compared to the alternative. Not that it's necessarily easier, quite the contrary.
The necessary condition to fully exploit it is to understand it. This means mastering the main strategies and solutions.
This article was created precisely for this reason: to offer a primer on short-term trading, through an understanding of the three strategies that fall under the concept of "short-term".
What is short-term trading
What exactly do we mean by short-term trading? Well, the literal meaning comes to our aid. Simply put, short-term trading is an investment approach that involves opening and closing positions in quick succession. Positions can last from a few seconds to a few days, or even a couple of weeks. It contrasts with long-term trading, which instead requires holding positions for several months or even years.
Short-term trading is also known as active trading. In fact, the trader is required to "attack" the market, exploit price movements, and consider contingencies, rather than relying on asset fundamentals.
This creates greater opportunities, as is always the case with proactive approaches, but also potential risks. Therefore, it's important for the trader to know their stuff.
The best markets for short-term trading
Some markets, or rather some asset classes, may be more compatible with the short-term concept than others.
Characteristics such as volatility and reactivity to market movers play a role. Generally speaking, when a market or asset class exhibits a certain level of volatility and its prices significantly depend on the extra-market environment, then short-term trading can be considered a viable alternative.
The Forex market, for example, is perfect for short-term trading, as it is volatile and susceptible, but only to a certain extent. It still retains a wide margin in terms of analytical effectiveness. In essence, traders can employ good technical analysis, but at the same time have the opportunity to exploit significant and sudden price movements.
The same goes for the stock market, which, if possible, has an even closer link with its market movers.
As for cryptocurrencies, short-term trading is almost mandatory. Not so much because it expresses a "controllable" volatility (on the contrary, the volatility is extreme), but because it is essentially impossible to practice good position trading. Bitcoin and its peers have almost no fundamentals, in the sense that their fate is dictated by trading.
The crypto market represents a unique case in this regard. It has no substantial market movers, yet it is still very susceptible to what happens outside the market.
Scalping
Having clarified the general characteristics of short-term trading, we can now address the three main strategies. Let's start with the most controversial one: scalping.
Scalping refers to the trading strategy that involves opening and closing positions in an extremely short time frame. By "extremely short", we mean minutes, if not seconds. The goal of scalping is to generate numerous, but small, profits. This objective is pursued by systematically exploiting even the slightest price movements.
It is very difficult to practice good scalping. Firstly, because the trader doesn't have enough time to "reflect and analyze". They must make decisions immediately, based on their prior knowledge and, why not, their intuition.
Secondly, because scalping exposes the trader to enormous psychological pressure. Traders are under stress even when they have time on their side, let alone when time is scarce. Hence the need to develop a solid background in terms of skills and mental abilities.
For this reason, it is generally reserved for true trading experts.
Day trading
The situation is radically different for day trading. We are still in the field of short-term trading, but it's a whole different world. Day trading consists of opening and closing positions within the same day. In essence, you never close the day without having closed the open positions. So, we're talking about hours, even up to ten hours. This leaves ample room for analysis, although time is still of the essence.
In any case, day trading requires knowledge of extra-market events, since prices over such a short period are susceptible precisely to the market movers of the day. Therefore, there is a strong focus on fundamental analysis.
In any case, day trading requires the adoption of special protective measures. In fact, there is also a strong focus on stop losses. In a sense, they represent insurance against losses due to the need to conduct analyses quickly.
Swing trading
Swing trading is a particular strategy, and many don't even consider it short-term. In fact, it involves holding positions for days and weeks. The goal is not to exploit the events of the day, let alone sudden price movements, but rather the trends that form in an extemporaneous and non-structural way, but are still able to last over time.
Swing trading emphasizes technical analysis, but also fundamental analysis, if it suggests events capable of reversing a trend, confirming it, or otherwise exerting fairly long-lasting effects.
Traders who practice swing trading, or at least those who do so profitably, are characterized by solid foundations in technical analysis. They often focus on supports and resistances, price and volume indicators.
Many consider swing trading a balanced strategy, within reach even for beginners. It's no coincidence that many trading systems are based precisely on swing trading.
