If you’re looking into investing in stocks, your first thought might be as to whether you’re a short term trader or a long term investor. Once you’ve figured that out, you’ll need to very carefully choose the strategy you’ll be exercising in your daily trading routine.
For the majority of stock investors who are looking for profits over a longer period of time, long term investments may be the way to go. Choosing long term investments allows for better risk management. Long term investing may be a little more predictable and also requires less management in comparison to others.
For some investors who are seeking returns, short term trading may be an appealing idea — but it can be a very risky business. This method of trading needs a slightly different approach to standard stock investing. In order to ensure you’re off to the right start, we advise researching the basics of stock trading, as well as going through some of the risks that novice traders make.
If you’re ready to take the first step, we’ll be taking you through the basics of short term trading.
1. Choose the right stocks
Some investors can effectively spot stocks with good long-term potential, but it can be a little more difficult to identify promising short term stocks.
Many experienced traders are known for hardly ever keeping their stocks for more than a day, so having the ability to spot and predict short term movements is key. They also tend to choose the more well-known and stable industries to trade in.
Here are just a few good rules for spotting stocks with good short-term potential:
- The moving average of a particular stock might indicate its potential. If its values are increasing exponentially, it could be a good candidate for short term investment. Likewise, a stock where the moving average is leveling out might be a good candidate for shorting, however, it does depend on a case by case basis.
- It’s important that investors research market cycles. Certain times of the year may be known for being a particularly flat month, where other months may experience gains. This type of cycle is practically invisible to the long term investor, but is of importance when short term trading.
- Another highly valuable component is understanding and knowing the market trend. For example, going against the trend when everyone else is selling (or vice versa) is inadvisable.
2. Technical analysis
It’s important to recognize that the outcome in short term trading is often built up on detailed technical analysis of potential stocks. It’s something that’s easily overlooked by the beginners.
The reality is that the market will consider every factor that will affect a stock very quickly, even before traders are able to realise. The outcomes largely depend on spotting patterns in a stock’s performance that other traders may have missed.
Technical analysis is a solid way of formalizing this strategy. Traders apply a set of repeatable principles that help spot patterns that might be otherwise overlooked. For example, the smartphone market is positively booming, but individual companies will vary widely in this trend. Conducting a technical analysis may reveal these patterns and assist a trader in their approach.
3. Hedging and managing risk
Managing and hedging risks are perhaps the most important aspects of stock trading, but it’s even more so when embarking on short term trading, due to its increased risk.
There’s several ways to manage risk in short term stock trading. Firstly, it’s important to make use of sell or buy stops, which will automatically sell your stocks when they drop below (or rise above) any particular price that you set. These types of tools may help protect a position from potential market reversals. For short term trading, a more common approach is to set a sell stop or buy stop within 10 to 15% of the opening price.
Secondly, you should be aware that in short term, high-volume trading, fees and charges can start mounting up quickly. If a trader isn’t careful of this, it could wipe out their entire position. This is actually why online brokers are popular for short term trading as their fees are lower. They may charge a small fee per trade, but it will still add up to way less in comparison with the higher brokerage fees and commissions.
The final thing to remember is that traders may consider having a portfolio as diverse as it would be if they were looking to hold on to their stocks for a long period of time. Simply just because one would sell their stocks quickly, doesn’t mean that they should forget the basic principles of investing. As we’ve noticed in the industries that have continued to experience success during the pandemic, putting a fallback plan in case of rapid market fluctuation is absolutely key for any investment strategy, including short term trading.
Short term stock trading could be a great approach for experienced traders, but it must be exercised with caution and research. Like other investment instruments, the techniques that could lead to higher outcomes, are generally those that carry the greatest risk, which is why it’s so important to understand and research the principles. Consider using a Practice account, like IQ Option features, to polish up and refine your skills before investing properly.