While short-term stock trading can be extremely lucrative, it also carries some risks with trades lasting for as little as a couple of minutes to several days. To successfully use short term stock trading strategies, investors must recognize the rewards and risks associated with each trade. They need to know how to identify ideal short-term opportunities while still protecting themselves.

What Is Short Term Stock Trading

Short-term stock trading is trading strategies in futures markets or stock markets where the time between entering and exiting falls within a range of a couple of days to a couple of weeks. Day trading is an extreme style of short-term stock trading with all positions being entered into and exited out of on the same day.

Investors must understand and master several basic short-term stock trading concepts to be successful as these fundamentals can result in profitable trades and devastating losses:

  • Learn key short-term stock trading terms.
  • Understand short-term trading strategy.
  • Recognize potential trades.
  • Learn to control risks.
  • Utilize technical analysis tools and techniques.
  • Understand buy and sell indicators.
  • Watch for patterns and cycles.

Learn Key Short-Term Stock Trading Terms

To be successful in short-term stock trading, it’s essential to understand basic key terms routinely used including:

  • Open – The time investors can start trading on a particular exchange. U.S. Stock markets open daily at 9:30 a.m. Eastern time based on NYSE and NASDAQ trading hours with pre-market trading hours starting at 4:30 a.m. Eastern and most traders starting to pay attention around 8 a.m.
  • Close – The close is the time a stock market is closed to trading. The NASDAQ and NYSE close at 4 p.m. local time with after-hours trading going until 8 p.m.
  • Day Trading – When investors, called day traders or active traders, buy and sell during the same trading day before markets close.
  • Moving Average – The average price-per-share of stock for a specified time with commonly used time frames, including 50- and 200-day moving averages.
  • Order – A trader’s bid to buy or sell a set amount of option or stock contracts.
  • Short-selling – When investors borrow shares from another investor with a promise to return the shares down the road at some point so you can sell the stock for a profit. This allows investors to take advantage of shares with prices they believe will decrease. Once an investor sells short, they can purchase the shares back at the reduced price point, keeping the price difference as profit.
  • Volatility – Price movements of the stock market or individual stocks. Stocks with wide intraday trading ranges and extreme daily ups and downs are considered highly volatile, common with thinly traded or low trading volume stocks.

Understand Short-Term Trading Strategy

A short-term trading strategy can be unpredictable and risky due to the stock market’s occasional volatile nature. Several factors can have significant effects on the price of a stock within a day or week, including consumer attitudes, company news, and reports. Simply reading financial statements or watching the news doesn’t prepare an investor for short-term success because by the time you get the information, potential investor gains are gone as the market has already responded.

The average price of a share over a set period or the moving average can be a good indication of when to buy or sell in the short term. If a stock has been experiencing an upward trend, it may present a gains opportunity while a downward trending stock provides an excellent short selling opportunity.

Analysts have developed market theories and formulas to increase short-term stock trading success. Many recommend investors buy right away after the highest chart bar while placing a trailing stop order to let profits run while cutting losses in response to changes in market prices.

Smaller or individual traders are generally advised to limit short term stock trading and encouraged instead to focus on buying and holding a position, or value investing for the long term. This strategy finds the investor reviewing their stock charts, balance sheets, and market signals every couple of months for buying and selling decisions.

Recognize Potential Trades

Investors need to know how to recognize the right trade, knowing the difference between a potentially good situation and situations to avoid. Too many times, traders get caught up in the moment, believing that by watching the evening news and reading the financial pages, they will stay on top of everything that’s happening in the markets when, in fact, by the time they hear about it, that markets have already reacted. Some basic steps for finding the right trades at the right times include:

  1. Watch Moving Averages – These illustrate whether a stock if following an upward or downward trend. A potentially good trade will have a moving average with an upward slope with good stocks for short sales having a flattening out or declining moving average.
  2. Understand Overall Patterns or Cycles – As an investor, recognizing patterns can be useful in determining good times to enter into short or long positions. Since 1950, the majority of the gains in the stock market have happened between November and April, with averages remaining relatively static May through October.
  3. Gaining a Sense of Market Trends – Investors often do minimal buying and consider shorting during a negative trend while purchasing with minimal shorting during a positive trend.

Learn to Control the Risk

There is a risk involved in short-term stock trading. One of the most critical aspects of successful trading is learning to control the risk to maximize returns while minimizing risks by using sell and buy stops to protect against market reversals. Sell stops establish an order to sell a share when it reaches a preset price while buy stops are used in a short position when shares rise to a set price.

Both of these are created to minimize investors’ downside. A good rule of thumb for short-term stock trading is setting sell and buy stops within 10%-15% of the price you purchased the share at or initiated the short to keep the losses manageable and the gains more considerable that any losses they may incur.

Utilize Technical Analysis Tools and Techniques

Markets are always looking to the future, with stock prices adjusting based on what’s happening. Meaning, everything an investor knows about company management, earnings, and other essential factors have already been priced into a stock. To stay ahead of other investors, you need to utilize technical analysis.

Technical analysis evaluates and studies markets and stocks using past patterns and prices to anticipate what may happen in the future. This is an especially important tool for short-term stock trading to make profits.

Understand Buy and Sell Indicators

There are several indicators investors use to determine the best time to buy and sell. Two of the more common ones are the stochastic oscillator and the relative strength index (RSI).

  • The Stochastic Oscillator assists investors in deciding if a stock is cheap or expensive based on its closing price range over a set period. A reading of 20 indicates the stock is inexpensive or oversold, while a reading of 80 is an indicator that a stock is expensive or overbought.
  • The RSI compares a stock’s relative weakness or strength compared to other commodities. Typically, a reading of 70 shows a topping pattern, while readings below 30 indicate overselling of a stock. It’s important to note that prices can remain at oversold or overbought levels for significant amounts of time.

Watch for Patterns and Cycles

Patterns in stock charts are another helpful tool for finding excellent short-term stock trading opportunities. Patterns can develop over multiple days, months, or even years, and while no two patterns are the same, they help predict price movements. Watch for critical patterns such as:

  • Head-and-Shoulders – Thought to be one of the most reliable patterns, head-and-shoulders shows a reversal pattern that is usually seen when a specific stock is topping out.
  • Triangles – Formed when the range between a stock’s lows and highs narrows and generally happens when prices are topping or bottoming out. As stock prices narrow, this indicates a stock may break out to the downside or upside in a violent fashion.
  • Double Tops – Happens when stock prices rise to a certain level on heavy volume, then retreat before retesting that same point on decreased volume signaling a stock may be headed down.
  • Double Bottoms – A reverse of a double top, here prices are falling to a certain point on heavy volume, then rise before heading back down to the original point on lower volume. Not able to break the low point, this pattern signifies the stock may be moving higher.

Short-term stock trading uses several tools and methods to make money as long as investors take the time to educate themselves on how to apply these resources to achieve success. Most investors are drawn to a particular strategy over others as they learn more about short-term trading before finding the right mix for their specific tendencies and appetite of risk.

Learn more about short-term stock trading, options, and how a small move in stock prices can result in success and profits by downloading Jeff Bishop’s eBook “Option Profit Accelerator.”

Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

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