Mastering Short-Term Trading

By Vinayak on Monday, September 9, 2013 with 3 comments

 February 26 2009| Filed Under » , , , , , , , ,                                                                                                        

Short-term trading can be very lucrative, but also risky. It can last for as little as a few minutes to as long as several days. To succeed at this strategy, traders must understand the risks and the rewards of each trade. They must not only know how to spot good short-term opportunities, but also must be able to protect themselves from unforeseen events. In this article, we'll examine the basics of spotting good short-term trades and show you how to profit from them.

The Fundamentals of Short-Term Trading
Several basic concepts must be understood and mastered for successful short-term trading. These fundamentals can mean the difference between a loss and a profitable trade. Let's take a look at these vital principles.

Recognizing Potential Candidates
Recognizing the right possible trade will mean that you know the difference between a good potential situation and the ones to avoid. Too often, investors get caught up in the moment and believe that if they watch the evening news and read the financial pages they will be on top of what's happening in the markets. The truth is, by the time we hear about it, the markets are already reacting. So, some basic steps must be followed to find the right trades at the right times.

Step 1: Watch the Moving Averages
A moving average is the average price of a stock over a specific period of time. The most common time frames are 15, 20, 30, 50, 100 and 200 days. The overall idea is to show whether a stock is trending upward or downward. Generally, a good candidate will have an increasing moving average that is sloping upward. If you are looking for a good short, you want to find an area where the moving average is flattening out or declining. (To learn more, read Moving Averages.)

Step 2: Understand Overall Cycles or PatternsGenerally, the markets trade in cycles, which makes it important to watch the calendar at particular times. Since 1950, most of the stock markets gains have occurred in the November to April time frame, while during the May to October period, the averages have been relatively static. Cycles can be used to traders' advantage to determine good times to enter into long or short positions. (For more insight, see Understanding Cycles - The Key To Market Timing.)

Step 3: Get a Sense of Market TrendsIf the trend is negative, you might consider shorting and do very little buying. If the trend is positive, you may want to consider buying with very little shorting. The reason for this is that when the overall market trend is against you, the odds of having a successful trade drop even more. (For related reading, check out Short- Intermediate- and Long-Term Trends.)

Following some of these basic steps will give you an understanding of how and when to spot some of the right potential trades.

Controlling Risk
Controlling risk is one of the most important aspects of trading successfully. Short-term trading involves risk, so it is essential to minimize risk and maximize return. This requires the use of sell stops or buy stops as protection from market reversals. (For background reading, see The Stop-Loss Order - Make Sure You Use It.)

A sell stop is a sell order to sell a stock once it reaches a predetermined price. Once this price is reached, it becomes an order to sell at the market price. A buy stop is the opposite. It is used in a short when the stock rises to a particular price and it becomes a buy order.

Both of these are designed to limit your downside. As a general rule in short term trading, you want to set your sell stop or buy stop within 10-15% of where you bought the stock or initiated the short. The basic idea here is to keep the losses manageable so that the gains can always be considerably more than any losses you may incur.

Category: Analysis

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3 comments:

Amelia Hove said...
May 8, 2015 at 4:25 AM

This is very correct blog to do mastering in short term trading in forex and do technical research in forex trading to get more profit. So take best trading tips for forex signals.

nancy john said...
August 15, 2015 at 9:21 AM

Hence it’s prove that Forex trading required expertise for earning decent income and if proper guidance will not attain by traders the game become deadly

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