Short Term Trading: What You Need to Know

What is Short term trading?

Short term written in wooden blocks in red notebook.

Short term trading refers to those trading strategies in stock market or futures market. On the other hand, short term trading can be very profitable, but it can also be risky. A short term trade can last for as little as a few minutes to as long as some days.

Indeed, short term trading is one of the most popular trading methods adopted by retail traders.

In addition, day trading is a very short term style of trading. Therefore, to be successful at this strategy, traders must understand the risk and rewards of every trade. Because of that, short trading can be risky and unpredictable because of the volatile nature of the stock markets.

Even more, traders must not only know how to spot good short term opportunities. However, traders should know how to protect themselves.

With short term trading styles, such as scalping and day trading, you need to have time and energy to spend in front of your screen following the markets to spot trading opportunities.

Let’s review the best short term trading strategies used by the most successful traders in a simple step-by-step guide:

See also: Day Trading Strategies for New Traders

Step #1

The Moving Averages

As a matter of fact, day traders need continuous feedback on short term price action to make lightning-fast buy and sell decisions.

Though traders often use Moving Averages to get a line on their charts that smooth’s prices of currency pairs to better reflect market sentiment: bullish, bearish, and indecisive.

Furthermore, 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. In general, a good candidate will have a moving average that is sloping upward.

In addition, simple Moving Average (SMA), Weighted Moving Average (WMA), and Exponential Moving Average (EMA) are the types of MA.

The difference is the weight they give to the last prices in their calculations. Usually, the SMA use for confirm the trend while the EMA used choose when to enter the market.

Moving averages are often used as a trend filter: if the prices are above the MA, then prices follow a bullish trend, while if prices are below the MA, then prices follow a bearish trend.

Using the moving average on the chart will help to spot important psychological levels, such as support and resistance levels.

Step #2

Understand Overall Cycles or Patterns

As bulls and bears fight for control, Pattern Cycles are born. Meanwhile markets won’t travel upward to infinity or downward below zero, recognizable swing trades appear in each time frame.

Particularly, driven by emotional behavior, trend inhales and exhales. Falling price ignites fear as paper profits evaporate. Fresh rallies awaken greed, inviting momentum players to become greater fools. On and on it goes.

Generally, the markets trade in cycles which make it significant to watch the calendar at specific times.

Since 1950, most of the stock markets gains have happened in the November to April time frame, while during the May to October period the averages have been relatively static.

Cycles are uses to traders’ advantage to determine good times to enter into long or short position.

Step #3

Get a Sense of a Market Trends

To illustrate, a market trend is a perceived tendency of financial markets to move in a specific direction over time. These trends are classified as secular for long time frames, primary for medium time frames, and secondary for short time frames.

 Also, traders try to recognize market trends using technical analysis, a framework which characterizes market trends as expectable price tendencies in the market when price reaches support and resistance levels, varying over time.

A trend can only be determined in hindsight, subsequently, at any time prices in the future are not known.

Moreover, if the trend is negative, you may consider shorting and do very little buying. If the trend is positive, you might want to consider buying with very little shorting. When the whole market trend is against you the chances of having a successful trade drop.

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

See also: What You Need to Learn about the Stock Market

Controlling Risk in Short Trading

Risk word in cubes.

In particular, controlling risk is one of the most significant aspects of trading successfully. Short term trading involves risk, so it is important to minimize risk and maximize return.

Furthermore, this requires the use of sell stops or buy stops as protection from market reversals. A sell stop is an order to sell a stock once it reaches a predetermined price. When this price is reached, it becomes an order to sell at the market price.

In other words, a buy stop is the opposite. It is used in a short position when the stock increases to a specific price, at which point it becomes a buy order.

Even more, both of these are intended to limit your disadvantage. As a general rule in short term trading, you want to set your sell stop or buy stop in 10% to 15% of where you bought the stock or started the short.

Indeed, the idea is to keep losses manageable so gains will be considerably in excess of the unavoidable losses you experience.

See also: 9 Forex Trading Risks You Need to Consider

Technical Analysis

To illustrate, technical analysis is an analysis methodology for predicting the direction of prices through the study of past market data, primarily price and volume.

Furthermore, social economics and quantitative analysis use many of the same tools of technical analysis which, being an aspect of active management, stands in contradiction to much of modern portfolio theory.

The efficacy of both technical and fundamental analysis is disputed by the efficient-market hypothesis which states that stock market prices are essentially unpredictable.

Moreover, technical analysis is a procedure of evaluating and studying stocks or markets by using previous prices and patterns to predict what will occur in the future.

In short trading, this is a significant tool to help you to understand how to make profits while others are unsure.

Buy and Sell Indicators

Some indicators are using to determine the right to buy and sell. Two of the more popular ones include the relative strength index and the stochastic oscillator.

See also: Buying and Selling Shares 101: A Beginner’s Guide

Relative Strength Index

RSI written on a book.

The relative strength index (RSI) is a technical indicator used in the analysis of financial markets. It is intended to chart the recent and historical strength or weakness of a stock or market based on the closing prices of a latest trading period. The indicator should not be confused with relative strength.

The RSI is a technical indicator used in the analysis of financial markets.

Stochastic Oscillator

The Stochastic Oscillator is a momentum indicator that uses support and resistance levels.

RSI and stochastic oscillator can use as stock-picking tools. However, you must use them in conjunction with other tools to spot the best opportunities.


Another tool that can help you finds good short term trading opportunities are patterns in stock charts. Pattern can improve in excess of some days, months or years. While no two patterns are the same, they can use to predict price movements.

Here’s the some patterns.

Head and shoulders

The head and shoulders, considered one of the most dependable patterns, is a reversal pattern often seen when a stock is topping out.


A triangle is formed when the range between a stock’s highs and lows narrows. This pattern often happens when prices are bottoming or topping out. As prices narrow, this means the stock could break out to the advantage or disadvantage in a violent fashion.

Double Tops

A double top occurs when prices rise to a certain point on heavy volume, retreat and then retest that point on decreased volume. This pattern signals the stock may be headed lower.

Double Bottoms

A double bottom is the reverse of a double top. Prices will fall to a certain point on heavy volume and then rise before falling back to the original level on lower volume. Unable to break the low point, this pattern signals the stock may be headed higher.


Short term trading uses a lot of methods and tools to make money. The catch is that you must to educate yourself on how to apply the tools to achieve success.

As you learn more about short term trading, you’ll find yourself drawn to one strategy or another before settling on the right mix for your particular tendencies and risk appetite.

The goal of any trading strategy is keeping losses at a minimum and profits at a maximum, and this is no different for short term trading.

Because of the risk of short term trading, small investors are often suggested to limit short term trading and lean further to value investing or buying and holding a position for the long term.

According to Israelov and Katz, “Our suggestion (for long term investors) is to use short-term information for trade modification.”

This strategy has the value investor reviewing his stocks balance sheets, market signals, and charts every couple months in order to buy more or sell.

Trading in the short run is viewed as one of two things: gambling or the possibility of strategic investing.

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