How can we master short-term trading? What are the risks associated with it?

How can we master short-term trading

If you have money that you are looking to invest in the stock market, traditional wisdom would throw up a ‘Purchase and Hold’ strategy. Here, you can purchase the stocks and hold on to them for some time, ranging from weeks, months to years.

Short-term trading refers to the strategy where one holds the stocks only for a few minutes to a few hours and sells out within the same trading session. Short-term trading is gaining popularity as a way to benefit from minimal market movements against the traditional long-hold method as market participants are becoming more aware and real-time information is becoming easily accessible.

Here you can find more on short-term trading and the ways to master it.

What is short-term trading?

The trading strategy where the time difference between entering and exiting the market is short is termed short-term trading. This time range can simply be a few minutes, hours, or even a few days. With short-term trading, your primary focus is on price action and not on the longevity of any asset’s market value. In this trading method, which also goes by the term ‘active trading’, you stand a chance to profit from the swift market price movements. However, for this, you must keep your eye on the market to make a quick move whenever there are fluctuations. To make this task easier, you may engage with qualified portfolio managers such as Teji Mandi, who will assist you in strategizing all your investments, including stocks.

Most popular markets for short-term trading

There are a ton of market options for short-term trading, and your choice would vary on the basis of your interests and personal preferences. The most popular markets are:

Forex

This market is known for its extremely volatile nature and is popular due to its array of currency pairs that are available for trading. Due to its volatile nature, the short-term traders have a plethora of occasions to trade on forex pairs, both in the short and long term. The forex market is also popular due to its liquidity, which allows you to enter and exit the market easily and quickly.

Shares

The stock market provides hundreds of shares to trade in, and this large variety is one reason why the share market is so popular. To invest in the share market, you can take two avenues: predicting the future market price of assets or investing via any share dealing service. Moreover, the gains you make from buying and selling stocks are taxable. Learn more about the rates applicable to this in our article on taxes on investments on the Teji Mandi blog.

Indices

Indices trading patterns have a similar pattern to that of share trading (like restricted market hours). In indices trading, you’d not be predicting any individual stock but the number of shares in different companies that are a part of the index. This offers a larger exposure to the market.

Commodities

Short-term trading in commodities includes trading in assets like gold, silver, oil, sugar, and likewise.

Four strategies to master short-term trading

A trading strategy is a methodology that offers you advantages to entry and exit in trading. This strategy gives a framework of when and where to trade and which point will offer maximum profit. These strategies rely heavily on technical analytics and are essential to know because they’ll be a stepping stone for you to master short-term trading. The most popular strategies are:

Range trading

In this simple strategy, you have to make the most of market trading between the support and resistance lines to enter and exit the market. The price movement in this trading is limited, and you can take advantage of the minute spike points. To predict the price breach level, you can use certain indicators or tools, such as the RSI or Relative Strength Index, or the Stochastic Oscillator.

Momentum trading

In this strategy, you will buy and sell the assets on the basis of its recent trend strength, or rather the momentum of this trend. In this strategy, you’d have to get an idea of the forces acting behind the market movements and if they are strong enough. A short-term price increase attracts a lot of traders, which pushes the price further upwards and vice versa. If you’re employing this strategy, then you’d have to analyse the strength of these movements.

Breakout trading

In this strategy, you’ll enter a trend at the earliest point and be prepared for a break in the market price. You have to recognise those points at which a market change will take place, indicating the volatility of the market and the onset of a fresh trend. If you enter the market at this breakpoint, you are ensuring that you’ll stick to the trend till its end to maximise your profits.

Reversal trading

In this strategy, you would have to identify if and when the present trend will change its pace and direction. The reversals can be in either way. It is a ‘bullish reversal’ if the market can transform into an uptrend, and a downward trend is known as a ‘bearish reversal’. By identifying the most profitable price level, you can maximise your revenues.

Short-term trading is recommended only for seasoned traders who have in-depth knowledge of the market. Let us see why.

Is short-term trading risky?

Short-term trading is very risky, especially when compared to investing in the long term. You can argue that since the trading duration is quite short, the risks of short-term trading are quite minimal, and you can free up your invested capital and invest it again in fresh stocks in case of a wrong decision. However, market unpredictability can be a stress for the traders, and making every trade involves rapid decision-making, adding to the stress. This can be choosing the best course of action within minutes, with no certainty of the outcome. Also, short-term trading can be a costlier affair if compared to the long-term one because of higher transaction volume and thus involves a greater capital amount.

For investors looking to grow their wealth for a specific goal such as retirement, children’s education, or even a wedding, long-term investing can be a safer option. The long duration allows you to ride out the fluctuations and be unaffected by everyday highs and lows.

To read more about the difference between investing and trading, read our article – confused between investing vs trading? Clear your doubt here – on the Teji Mandi blog.

Are you also looking for investment opportunities to use your extra cash? Then why not invest your hard-earned money in stocks or mutual funds? And if you’re confused about where and how to invest, then Teji Mandi is your one-stop solution! We are a SEBI registered investment advisory app, and can not only guide you with every investment-related decision but also help you to manage and update your portfolio easily. At Teji Mandi, we work to analyse your profile for risks and invest in stocks that offer only the highest returns.

The bottom line

Short-term trading is a profitable trading avenue if your goal is to make the best of the smallest market movements. These movements largely go unnoticed on a larger time scale, and with just the right tools and techniques, you can easily maximise your revenues. However, before investing, you must educate yourself on the various methods, and soon you’d find that you’re drawn to one trading avenue more than the others. Make sure that you decide by keeping your risk appetite in mind, analyzing your resources and being mindful of your goals before fixating on any capital amount or strategy.

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