Short-Term trading strategies and How to use them
Traders use short-term trading strategies as a way of trying to take advantage of the smaller price movements that occur within a particular financial market. In this guide, you will find out more about the different types of short-term trading strategies and how you can start using them.
When you are a short-term trader you normally hold a position that lasts from seconds to a week. This strategy replaces the more traditional buy-and-hold strategy where investors and traders normally hold positions for weeks, months and or years. Price actions will be the main focus of a short-term trader, therefore, technical analysis will be favoured over fundamental analysis. Short-term trading is also known as active trading, coined from the trading of passive funds.
What is short-term trading used for?
This style is most effective when there has been a recent release of economic data, political events and company news.
You don’t need to own the underlying asset when you use short-term trading strategies as this strategy involves speculation. Derivative trading such as using CFDs to trade is normally the most common option, as it allows traders to place a small margin to try and profit from the rising and falling market prices. However, even though trading on margin can magnify profits, it is also high risk and losses can also exceed deposits.
What are the different short-term trading strategies?
Scalping
Scalping involves being really fast when opening and closing positions in the financial markets. Normally, positions are held from a few seconds to minutes and are the shortest of the trading styles we have explored in this article. When a scalper wants to make the most out of market movements. They will open and close a trade almost immediately as a way of staying ahead of market trends. Traders who prefer this strategy will want to have a higher win ratio compared to their trading losses.
This strategy is not ideal for a beginner who only wants to enter the financial markets and open positions every so often. This is because the strategy involves a lot of dedication. If you are considering using this strategy please be aware of any costs you might face as a result of opening and closing trades, if there are any and how much they could take away from potential profits.
Day Traders
This is the most common form of trading. If you are a day trader then you will be buying and selling financial instruments within the same day. No positions will be held overnight when you are a day trader. When making trades using this strategy you will need to be very decisive in order to open and close trades fairly quickly. This is due to the fact markets can still experience high amounts of volatility throughout the day. You will also need to be aware of any slippage that can occur during any fast price movements.
Slippage is the difference between the expected price and the price at which a particular trade is executed. It normally occurs when the markets are experiencing high amounts of volatility. The only difference here is that day traders will close out positions at the end of the trading day.
Swing Traders
Swing traders will hold positions that could last days to even weeks. These positions tend to normally experience larger market movements. When you are a swing trader you look out for market trends and try and take advantage of price highs and lows. Therefore they rely heavily on technical analysis and especially past price patterns.
What is trading on margin and leverage in trading?
Margin trading refers to using borrowed funds from a broker to purchase a financial asset or assets in a larger volume. Traders use margin to buy more stock than they would normally be able to (or afford to do). Margin is then used to create leverage to enter larger trades or open larger positions. This is in a bid to magnify gains.
Leverage and margin go hand-in-hand, with leverage relating to how the borrowed capital is used and traded. Leverage allows traders to open larger positions by using the margin as collateral or more simply; a safety net. To determine how large your position is, leverage is expressed as a ratio.
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