Saxo Group
Venturing into finance can be time-consuming and complicated if you do not know where to start. Everything new takes time, and one of the most important first steps in this process is understanding the different types of trading available and how a trade's timeframe influences your chosen strategy.
This guide will focus on short-term trading, which typically lasts a few seconds and minutes to a few days. This is a big difference from medium-term trading and long-term trading, which cover weeks, months, and sometimes years.
As we mentioned, short-term trades last between a few minutes and a few days, allowing you to benefit from smaller market fluctuations. Sometimes, short-term trades may last only a few seconds. Because the timeframe of this trading style is short, traders focus more on rising and falling market prices.
You can also see your trading results quicker than if you were conducting long-term trades that focus on an asset’s fundamentals.
This pace is a major advantage of short-term trading, but since you are actively looking for market volatility, you need to spend a lot of time monitoring key economic indicators like company earnings and economic data releases, both of which can affect movements in market prices that short-traders can take advantage of.
There are three main types of financial instruments: foreign exchange instruments, cash instruments, and derivative instruments. One example of foreign exchange instruments includes outright forwards, while cash instruments include securities, deposits, and loans.
Derivative instruments include spread bets and contract for difference (CFDs), and these instruments are more popular with short-term traders. That is because they do not need to own the asset to execute the trade. For instance, CFD trading (which has been around since the 1990s) involves speculating on price movements without taking ownership of the underlying asset.
If you think the price of gold is going to increase, you can offer this holding for sale without buying physical gold.
Short-term trading, otherwise known as active trading, has several advantages. You have the opportunity to make massive gains in small timeframes, and you often have more control over your finances and less risk since you can enter and exit the market within a single day.
When you exit the market, you are not exposed to overnight risks like unexpected market fluctuations and overnight fees and costs.
You can also open and close several trades at once, and by making more trades, you are reinvesting your capital.
As we mentioned earlier, short-term trading requires a lot of analysis, which could put you at risk if you cannot commit the time to spending multiple hours in front of your monitor examining technical charts.
Cost-considerations are also a risk. Short-term traders have to be incredibly mindful of administrative costs as brokers usually charge fees and/or commissions on each order. Therefore, you have to take this into account if you’re opening and closing multiple positions per hour/day. Saxo always offers low prices to help our clients trade for less.
Before you begin short-term trading, consider factors like your risk appetite, how well you work under pressure, and how much time you will put into your trades. If you are a part-time trader, for instance, certain styles of short-term trading will not work for you.
Scalping is one of three short-term styles you can adopt, but it is an extremely time-sensitive form of trading that focuses on small intraday price movements. The other two primary styles that you can choose from are day trading and swing trading.
With day trading, you are entering and exiting trades within one day. You can either open and close one individual trade or make multiple trades and take advantage of no overnight costs. Day traders need to be vigilant and work well under pressure since they have to make quick decisions to enter and exit trades.
You also have to be very committed to this trading style, since day trading involves frequently monitoring your position throughout the day and conducting technical and fundamental analysis. The most common technical indicators that day traders use to their advantage include the Stochastic Oscillator and the Relative Strength Indicator. Both help identity market conditions and fluctuating trends.
Swing trading differs from day trading in a lot of ways. For starters, you do not have to sit in front of your monitor for hours because you are holding your position for more than one day.
Typically, swing trading lasts for several days, making it the longest timeframe in short-term trading. This makes swing trading a popular style for people with other time commitments, such as a full-time job, school, or taking care of their family.
But that does not mean you do not have to put in the work and spend at least a few hours conducting technical analysis. That is because, with swing trading, you want to find a trend and then capitalise on it. If trends are flying under your radar because you did not see them, you will not profit from this short-term trading style.
As mentioned, scalping is the most time-sensitive short-term trading style, since most trades are only open for a few seconds or minutes. Scalpers will wait to see if a market moves in their favour and then enter and exit the trade, which allows them to make small profits frequently. Because of this, scalpers look for high trading volume and liquidity, which is why most people trade major currency pairs like EURUSD and GBPUSD.
It is also why scalpers tend to trade at the busiest times of the day, since there is more trading volume. Scalping is not only time-sensitive, but it is very fast-paced and intense, so you have to work under pressure if you choose to adopt this trading style.
Now that you know the different trading styles involved in short-term trading, it is time to learn about the different markets you can use these styles in. If you want to make short-term trades, the most popular markets include indices, shares, and foreign exchange trading (forex).
When you trade indices short-term, you can adopt a day trading style and speculate on different company shares instead of an individual stock. Keep in mind there are disadvantages to short-term trading indices since there are restricted market hours (which means less volatility).
Another disadvantage is that because you are not speculating on an individual stock, you are exposed to more factors that could impact your trade.
Share trading is popular with short-term traders because you can prioritize short-term gains over long-term gains. The stock market offers thousands of shares to trade, but like with indices, you have to adopt a day trading strategy since stock markets have specific trading hours.
You can also hold positions on shares for a few days and look for brokers that offer out-of-hours share trading. That way, you can trade stocks outside of market hours and capitalise on any company announcements.
Forex short-term trading is the most popular option, especially for scalpers, since the market offers high volatility, trading volume, and liquidity. These factors allow short-term traders to go long and short on currency pairs and enter and exit trades quickly. Forex pairs are also available to trade 24 hours a day, which means you are not restricted by specific trading hours like you are in share and indices trading.
Learning what short-term trading means and how it differs from medium and long-term trading is the first step, but how do you begin if you know this is the route you want to go down? Fortunately, it’s simple to get started, and you can begin your trading journey by following these steps.
If you know you work well under pressure, you can choose day trading or scalping. But, if you cannot commit to frequent analysis and position monitoring, look into swing trading.
After you know what type of short-term trader you want to be, consider the available markets you want to trade short-term, such as forex or the stock market. Do you want to trade currency pairs or shares? Do you want to trade 24 hours a day, or are you okay with closing your positions because of restricted trading hours? These are all decisions you need to make before you start short-term trades.
Once you know what type of short-term trader you are and which market you want to trade in, you can pick your preferred trading strategy. In short-term trading, strategies help you identify when you should enter and exit a market, helping you take a profit or avoid losses. Some of the most common strategies in short-term trading include reversal trading, momentum trading, and breakout trading.
With reversal trading, you are identifying when a current market trend could change. For example, if you identify a bearish reversal, this means the market is at the peak of an uptrend, and it could become a downtrend soon. A bullish reversal is the opposite, showing that the market is at the bottom of a downtrend, but it could change direction and become an uptrend.
When a price has been increasing, it gets more attention, and traders send the price higher. The same goes for when a price falls, as short-sellers will push the price lower. With momentum trading, you are trying to capitalise on the strength of a trend, and traders will often use moving averages to help them decide whether a stock or currency is going to increase or decrease.
Breakout trading is the most popular strategy with day traders. It involves watching for the start of a new trend and then entering it as early as possible so you can capitalise on it from start to finish. There are various tools that can help with breakout trading, such as limit orders. Limit orders will execute a trade for you if a breakout occurs so that you are not having to constantly monitor the market for it.
Some platforms allow you to practice using your strategy with a demo account. Since trading involves real money, you never want to jump into trading without being sure you know what you are doing. There are also online courses available on several platforms that allow you to continue to learn about short-term trading and its different strategies.
After you have practiced for a while through your demo account, when you feel ready you can start trading shares, indices, commodities, or forex. You can use the same platform you opened a demo account with to open a real account to trade on live markets. Remember to keep calm while opening and closing positions. Also, if you have decided to go with a day trading strategy, ensure you are carefully watching for any market fluctuations and price changes.
Learning about the different types of trading available is the first step in starting your venture into the world of finance. Consider the timeframe of a trade and if (and how) you work under pressure. You also have to think about how much time you can commit to trading before you adopt the strategy that works for you.
Short-term trading has many advantages, styles, and strategies to choose from, from day trading to scalping and reversal trading to breakout trading. You can see your trade results quicker than long-term trading as you only hold your positions for a few minutes to a few days. But this requires you to spend a considerable amount of time monitoring the position of your trades.
If you think you can commit to this, short-term trading may be for you. And with Saxo’s competitive low fees and prices, you can start short-term trading confidently knowing that you are trading for less.
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