What is short-term trading? Short-term trading involves positions that might last from minutes to several days. It is an alternative to the buy-and-hold strategy, in which you can hold a place for weeks, months, or even years.
Short-term trading mainly focuses on prices more than the fundamentals of an asset. This style of trading tries to profit from quick moves in market prices and looks for market volatility around critical economic data releases, political events, and company earnings.
Short-term trading is considered active trading, as the style differs so mainly from trading passive funds or investing. It is usually speculation-based, which means that it does not have to involve buying and selling the underlying assets themselves. Instead, short-term traders prefer derivative instruments representing the ability to enter and exit trades without owning the asset itself. These include options, spread bets, and CFDs, allowing traders to profit from falling and rising market prices.
How to start short-term trading
If you want to start short-term trading, you have to consider some of these tips:
- Choose carefully which type of short-term trader you want to be
- Do research what kind of markets you are able to trade in a short term perspective
- Define your short-term strategy
- With an IG demo account, you should practice your strategy
- You have to open an account to trade on live markets
There is also an alternative to continue learning about different strategies and techniques with IG Academy’s multiple online courses.
Types of short-term traders
There are various different styles that short-term traders tend to choose from, depending on their time and risk. These are:
- Day traders
- Swing traders
What is Scalping?
Scalpers always profit from price changes by opening their positions that can last between seconds and minutes. So far, it is the shortest trading style listed here.
A scalper will always think to make small profits very frequently by entering a platform and leaving it as soon as the market moves positively for them. It is the absolute opposite of the idea of letting profits circulate. This kind of traders always grab their profits and cut losses shortly after in order to maintain a high win.
Scalping is incredibly time-consuming and is not for someone who wants to be a part-time trader. However, many scalpers use high-frequency trading, executing several orders in seconds. For other traders looking to trade in the short term, this style can be attractive and risky. It is essential to be aware of the costs you have to incur for opening and closing trades. You have to ensure these costs do not overlap your profits.
Day traders always buy and sell their assets on a single trading day. It is because to avoid paying overnight costs. This action is called a short-term trading style because it takes advantage of small market movements while frequently trading during the day.
This style requires making fast decisions to get in and out of trades as soon as possible to get efficient profit. There might be vast amounts of volatility even during a single trading day. It is needed to create a favorable trading environment, but you should also be aware of its risks. As an example, rapid price changes might lead to slippage.
However, many short-term trading styles let positions run if necessary while day traders close their trades at the end of the day.
Swing traders focus on taking a position in a more significant move, which might last several days or even some weeks. It is the most extended style of short-term trading because it takes advantage of medium movements as well.
Swing traders attempt to spot a trend, capitalize on the falls, and rise in the overall price movement. They often rely on technical analysis identifying the entry and exit moments for each trade.
Swing trading is described as a short-term trading style, but no specific timeframe constrains it. Therefore, in theory, it might also classify as a long-term trading style as it might last longer than several weeks.
Markets where you can trade short term
There are multiple markets where you can trade for the short term. The most popular short-term markets include:
Perhaps it is the most popular short-term trading market because of the number of currency pairs available to trade 24 hours a day and five days a week.
The forex market is well-known for its high volatility, which provides short-term traders with various opportunities for going on forex pairs. The market is also famous for its deep liquidity, making it easy for traders to enter and exit from their positions quickly.
When trading Forex using a short-term strategy, you would consider a rollover fee for doing so if you hold positions open longer than a day.
There are millions of shares available to trade in stock markets all over the world. It is the wide variety that makes share trading popular with long-term as well as short-term traders.
Although stock markets have their specific trading hours, there can be less volatility out of hours. However, they are still a favorite for those looking to trade short-term.
It is also good to keep in mind that some brokers offer out-of-hours trading options on shares. For example, with IG, you can trade around 70 key US stocks outside of the market hour to make the most company announcements.
There are two routes to take a position on shares: speculating on the future market price in spread bets and CFDs or investing using our share dealing service. However, trading is more suitable for someone who wants to use it over the short term.
Short-term trading indices can fall into a similar pattern to share trading because there are restrictions on market hours. So, you could focus on intraday movements and follow a day trading style or maintain your position for a few days or weeks.
Trading commodities allow you to take a shorter-term view on multiple assets such as gold, oil, silver, sugar, and wheat.