Short-term trading can be a very profitable venture. However, it also carries a lot of risks. So, here are some very useful tips for your short-term trading attempt to become successful.
Finding and spotting the right trade implies that you know the difference between a good potential trading situation and you also know the ones that you should avoid.
More often than not, investors believe that if they keep their eyes on the evening news, they’ll be on top of the latest developments.
In reality, by the time the news reaches them, the markets are already reacting. To fix this, there are some basic steps to follow to find the right trades at the right time.
Look at the Moving Averages
The moving average refers to the price of the stock at a specific span of time. The most popular timeframes include 15, 20, 30, 50, 100, and 200 days of averages.
The idea is to have a visual of the stock’s movements, which could be trending upward or downward. In general, the ideal trading candidate will be those that have moving average sloping upward.
Learn Cycles and Patterns
In general, the financial markets trade in cycles, and that’s the reason it is important to monitor the calendar in particular times.
Since the 1950s, most of the stock market gains have taken place in the November to April timeframe. Meanwhile, the May to October period showed relatively static averages.
Learn Market Trends
If you see that a trend is negative, you might consider shorting. You may refrain from too much buying. If, on the other hand, the trend is positive, you may want to consider buying, while avoiding shorting.
Remember that when the overall market trend is not in your favor, the chances of incurring losses increase.
Controlling Your Risks
Controlling and mitigating risks are one of the most important aspects of successful trading. Short-term trading involves risks. That’s the reason it is essential to minimize risks and maximize the return.
To do this, you have to use sell stops or buy stops to protect yourself from market reversals. A sell stop is an automated order to sell a stock the moment it reaches a predetermined price.
Meanwhile, the buy stop is the opposite. This one is used in a short position in case the stock rises to a particular price.
These orders are created to limit the trader’s downside risks. As a general rule, the sell or buy stop order should be set within 10% to 15% of where you purchased the asset.
The overall idea is to keep the losses at a manageable level so that gains will be considerably higher than the inevitable losses you may incur.
Learning Technical Analysis
Technical analysis refers to the process of evaluating and studying the markets with the use of historical price patterns to predict what lies in the future.
In short-term trading, technical analysis serves as an important tool to help you understand the proper way to make profits while others are not sure.