Explore quick trading methods that can be higher risk and understand the basics and dangers. People who trade in this style often like markets where prices change a lot, so understanding how to handle these conditions is key.
Unlike long-term investing, like a buy-and-hold strategy, some strategies aim to profit from short-term price changes. These have special traits and bigger risks. Learning what they are before you try quick trading techniques like day trading, scalping, and swing trading is a good idea.
Key Ideas in Short-Term Trading
Quick trading can happen in any market with any type of investment. However, most traders who trade in this timeframe prefer markets that are more volatile. They often focus on markets like growth stocks, indexes, commodities, currencies, and cryptocurrencies instead of assets that are generally more stable, like bonds or blue-chip stocks, which don’t usually have as much price change.
When you trade can be as vital as what you trade. Markets are often more unstable when news is released, during earnings season, and for a half-hour before and after market opening times.
Trading activity often increases during these times because big investors like pension funds adjust their investments. Since institutional investors usually trade in large amounts, this can greatly affect overall trade volume.
Tip: You might find that certain markets or times of day work well with your trading style based on how volatile they are.
Trading fees and commissions have a big impact on whether you make or lose money in quick trading. This type of trading involves frequently entering and exiting positions, so you need to pay close attention to differences in buying and selling prices, financing charges, and commissions.
Keep in mind that profits from quick trades may be considered “speculative” by tax authorities, not “investments,” and therefore subject to higher capital gains taxes (CGT).
Understanding Risky Trading Methods
Some things that matter a lot in short-term trading don’t matter as much when investing for the long haul. For example, short-term traders usually focus more on technical analysis than fundamental analysis.
Technical analysis uses past price data to make numbers and trading alerts that point out short-term price differences.
Using short selling also allows more aggressive traders to target times when a market seems too expensive. Short-term traders aim to profit from markets dropping instead of waiting for an asset’s price to fall and then buying it when it’s cheap.
Main Approaches to Short-Term Trading
The three most common short-term trading methods are day trading, swing trading, and scalping. These methods overlap somewhat, but they differ mainly in how long trades are held.
Day traders, for instance, open and close trades within one trading day, never keeping positions open overnight. Swing trading is more flexible in terms of how long trades are held, lasting up to days. Those who use scalping might open and close trades in seconds.
Some platforms let traders create computer programs that buy and sell without human input. Generally, the more often trades are made, the more likely it is that the process will be automatic.
Technical Analysis for Making Fast Choices
Technical analysis tools like the Relative Strength Index (RSI) offer quick information about a market. Using them can help you understand the market and find trading opportunities.
Although tools can help you make quick decisions, there are some downsides. It’s possible that different tools will give conflicting signals, one suggesting “buy” and the other “sell.” This shows why it’s important to know what a tool might be telling you and how reliable it is.
For instance, if an asset’s price moves away from its long-term average, it could mean two things. The price may soon return to normal, or it might be about to break out. One scenario would require selling, while the other would call for buying.
Typically, the more technical indicators suggest a certain price movement, the stronger the overall signal.
Using Market Instability
Another important tool for short-term traders is leverage. This lets traders increase their overall trade size by using some of their own money as a deposit and borrowing from their broker to increase possible returns (and risks).
Using leverage is very risky. It increases both your potential losses and your potential profits. If losses exceed the amount you’ve deposited, the broker will close the trade and lock in your losses.
Setting Achievable Goals and Limits
Many investors fail at active trading because they don’t have enough time, make hasty or emotional decisions, or start with goals that are too high. It’s vital to stick to a plan with realistic targets.
If you’re trying to get large returns from a small amount of money, you’ll have to take on much higher risk, which is very challenging. Over time, it’s almost impossible to consistently outperform the market.
Starting with a risk-free demo account can help you test strategies and develop a way to reduce emotions from the trading process.
Analyzing Risk Versus Reward
One way short-term traders can stay disciplined is by using the risk-reward ratio. This turns the possible profit or loss of a trade into a simple number by dividing potential profit by potential loss.
Those who use stop-loss and take-profit orders can set up each trade to follow the risk-reward ratio, reducing the chance that one trade will significantly damage their overall profits.
Not every trade will be a winner, and the risk-reward ratio can help you determine if your strategy is profitable even with losing trades.
Some risks are the same as with other kinds of investing, but some are specific to quick, aggressive trading. Short-term traders can avoid overtrading and sticking to their plan by scheduling breaks during the trading day.
While some risks can be reduced, a general risk factor is that high-speed, short-term trading can lead to emotional decision-making.
Some traders use an “edge,” relying on statistics and analysis to gain a competitive advantage.
Tip: The term “short squeeze” describes how traders who have bet against a stock (“short positions”) can suffer large losses if the price goes up. As these traders buy shares to cover their bets, it can push the price even higher.
| Risks | Risk Management Tools |
|---|---|
| Overtrading: Treating trading like a regular “job” can create a sense of needing to trade constantly. Forcing trades when the market doesn’t suit your strategy is a quick route to losses. | Stop-Loss/Take-Profit Orders: These are automatic instructions to buy or sell at a specific price. You can set these when you open the trade or adjust them as it progresses. They help maintain discipline and protect against extreme price swings caused by news events. |
| Short Selling: If you buy an asset and its price drops to zero, you lose all your invested money. However, if you short sell, potential losses can be much larger than your initial investment. While the price can’t go below zero, it can rise infinitely. | Adjust Your Leverage: If you want to use leverage, choose a broker that allows you to adjust the leverage level for each trade. This allows you to better control your overall risk. |
| News Events: Short-term trading using technical analysis depends on the market continuing to act similarly to how it has recently. News events about geopolitics or a specific market can instantly change the market and make technical analysis unreliable. | Operational Risk: If you’re dedicating money to short-term strategies, you need to be sure you can follow events and trade quickly. Your personal technology, and that of your broker, need to be dependable. |
There are many potential risks involved in short-term trading, but there are also risk management techniques and strategies that can help reduce them.
Tip: Sometimes, the best decision is to not trade at all. “Boredom” trades are a fast path to losses.
Final Thoughts
All investing carries some risk, but short-term trading is on the riskier side. The chance to make returns quickly continues to make it appealing to some investors.
Those who truly understand the process and approach it with discipline have the best chance of success.
Visit the eToro Academy to learn more about short-term and higher-risk trading strategies.
Quiz
Which of the following is NOT a short-term trading strategy?
Dollar-cost averaging
Scalping
Swing trading
Day trading
FAQs
- What’s the difference between short-term trading and long-term investment strategies?
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The main difference between short-term trading and buy-and-hold investment strategies is how long trades are held. They also differ in the types of analysis, trade management, and trading tools that are used.
- How can traders manage risks effectively in risky trading scenarios?
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Success in risky trading requires the right mindset and understanding how to use the trading tools available. Different brokers have different trading platforms, so find one that suits your trading style.
- What tools and indicators are most useful for short-term trading?
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Short-term trading depends heavily on technical analysis indicators. These use market data like price and volume to help traders understand the market. They can be set to different time frames and used to find opportunities from seconds to hours. It’s also important to use an Economic Calendar to plan for news events that might cause price changes.
This information is for educational purposes only and should not be considered investment advice, a personal recommendation, or an offer to buy or sell any financial instruments.
This material was prepared without considering any specific investment goals or financial situation and has not been created according to the legal and regulatory requirements for promoting independent research. Not all of the mentioned financial instruments and services are offered by eToro, and any reference to the past performance of an asset, index, or investment product should not be viewed as an indicator of future results.
eToro makes no guarantees about the accuracy or completeness of this guide and accepts no responsibility for it. Ensure you understand the risks of trading before investing any capital. Never risk more than you can afford to lose.