Short-term trading refers to trading assets that can be converted into money or sold within a short period of time, typically from just two or three minutes to two or three weeks.
It is particularly popular with retail and institutional traders hoping to make a profit from small price movements and short-term trends.
Traders use short-term trading strategies as a way of taking advantage of the smaller price movements that occur within a particular financial market.
Short-term trading can be very lucrative but also very risky due to the unpredictable and often volatile nature of the stock market.
Here we take a look at different types of short-term trading.
Day trading
This is the most popular form of trading, with day traders buying and selling multiple financial instruments in the same day.
Such traders can use hourly charts to analyse price data and spot recent emerging or declining trends in order to decide whether to buy or sell a financial instrument.
Scalping
Scalping is an extreme short-term strategy whereby traders aim to enter and exit positions in a matter of minutes, or even seconds.
Scalpers often carry out hundreds of transactions on an average trading day in an attempt to make a significant profit.
This short-term strategy is often used for derivatives markets, including certain currency pairs such as the euro to US dollar (EUR/USD) and euro to British pound sterling (EUR/GBP).
With currencies and commodities such as Brent and WTI crude oil often experiencing rapid price movements on a daily basis, this strategy is not suitable for beginners.
Swing trading
Swing trading is a short- to medium-term strategy whereby traders hold open positions for a number of days or weeks in order to profit from an anticipated price move.
Swing trading exposes a trader to overnight and weekend risk, where the price could rise or fall and open the following session at a substantially different price.
Therefore, they rely heavily on technical analysis, especially past price patterns.
However, with the Cambodia Securities Exchange (CSX) having set a daily price change limit of +/- 10 per cent of the previous day’s closing price and the market open from 8am to 3pm, from Monday to Friday, except public holidays, this type of trading does not apply at the CSX.
Moving averages
A moving average is the average price of a stock over a specific period of time. The most common timeframes are 15, 20, 30, 50, 100 and 200 days.
Traders use moving averages to identify trends. When a stock’s moving average slopes upwards, it suggests an uptrend.
This can signal a buying opportunity, but aiming for the absolute lowest price might not be realistic.Conversely, if a trader is looking to sell and go short on an asset, a moving average that is declining or flattening should be looked for.
Understand patterns
Most of the gains in the US S&P 500 stock market index from 1950 to 2021 came in the November to April period, with averages fairly constant from May to October.
And if a trend is negative, very little buying should be conducted, while if a trend is positive, buying with very little shorting should be considered – but care should be exercised as market prices can fluctuate at any time.
Control risk
Sell stop and buy stop strategies require technical analysis – which evaluates investments using price trends and patterns seen in charts – to control risk and ensure successful trading.
A sell stop is an order to sell a stock once it reaches a predetermined price. Once this is reached, an order is issued to sell at that price.
For example: The current market price of stock A is $100, so John can sell his stock at a stop price of $90 to ensure a maximum loss of 10 per cent.
A buy stop order, meanwhile, instructs a security to be bought at the market price only after the stock’s value reaches a specified stop price, which could be 10 per cent above the current market price.
For example: Mary intends to buy stock B, which is currently valued at $40 but is expected to go up that day.
Mary can set a buy stop price of $44, which is 10 per cent above the current price. So when the price reaches $44, the trade is executed and Mary buys this stock.
As a general rule in short-term trading, stop-loss orders, including sell stops and buy stops, are commonly placed within 10 per cent of the entry price to limit potential losses
Investors should look at buy and sell indicators such as momentum oscillators.
These include the relative strength index (RSI) – which measures the speed and change of price movements – and the stochastic oscillator – a momentum indicator comparing a security’s particular closing price to a range of its prices over a certain period.
***Disclaimer: This article has been compiled solely for informative and educational purposes. It is not intended to offer any recommendations or as investment advice.
The SERC is not liable for any losses or damages caused by using it in such a way.
References: https://www.investopedia.com/articles/trading/09/short-term-trading.asp ;
https://www.eightcap.com/labs/short-term-trading-strategies-and-how-to-use.
Prepared by: Department of Research, Training, Securities Market Development and International Relations, Securities and Exchange Regulator of Cambodia.
Email: [email protected].
Phone: 023 885 611.
