Studying the market doesn’t make you a short-term trader. Knowing all the terminology that traders use doesn’t make you a short-term trader. Watching videos, buying courses, and chatting in forums don’t make you a short-term trader either.
So, how can you become a (successful) short-term trader? One word: strategy.
And while there are many strategies to choose from, at Real Trading we’ve identified those that can take you to the top in short-term trading.
But which is the best? There’s no right answer. It depends on the type of trader you are and want to be, and even on personal preferences. There is one truth though: when you develop your strategy, you must stick to it (which doesn’t mean it can’t change over time).
Whether you’re just getting started or are an advanced trader who needs new ideas, these short-term strategies (and tools) are what you need to succeed.
Table of Contents
Short-Term vs. Long-Term Trading
While markets and regulators don’t enforce rules on whether a trader qualifies as short-term or long-term, the difference is massive. It also has a significant effect on the strategies that you will use to trade.
A short-term trader buys and sells assets (sometimes referred to as financial instruments) within a short period, ranging from a few minutes to a few weeks at max. The traders who work in minutes are known as scalpers, and those who work in days or weeks are known as swing traders.
Short-term traders look for volatility and liquidity as positive trade entry indicators. They also rely on complex technology and data analysis to quickly identify trading opportunities and execute trades.
Long-term traders buy and hold assets for months or years, relying on large-scale economic growth to increase the value of their portfolio. They tend to study the fundamental metrics of the company or industry associated with the asset. Long-term traders are usually called “investors” and aim to build diverse portfolios to manage risk.
Understanding the Importance of Trends
Financial markets involve a high level of math and technology. Despite that fact, the movement of a given market does not obey fundamental laws the way physical objects obey the laws of physics.
Markets are made up of individual assets that are priced according to supply and demand. The price movement of a given asset is generally independent of any other asset. However, the aggregate movement of a market often has a broad effect on individual assets.
The movement of a market is a complex interplay of factors, including geopolitical changes, employment data, corporate earnings, legislation, trader psychology, and market sentiment.
Short-term traders must become masters of gauging market sentiment, as well as the supply and demand conditions that affect asset prices. The important note here is that it doesn’t matter whether the prices move up or down—a short-term trader can make money either way.
Tools of the Trade
Professional traders are methodical: they seek out the best tools and learn to use them efficiently. Of course, no traders use all tools available. Instead, they work with those that fit within their preferred way of trading and strategies.
Below are some of the tools that most short-term traders use—most of them are a must if you want to be successful.
- Trading platform: traders used to transmit their orders to a broker via telegraph or phone call. Today they can execute complex trading orders on specialized trading software that runs on a desktop or laptop. Not all trading platforms are created equal, and it’s arguably the most important tool a trader can use.
- Trading journal: professional traders take detailed notes on every trade. How much information you record is up to personal preference, but the value a trading journal offers cannot be overstated. It allows traders to learn from mistakes, refine strategies, and identify critical patterns in their trading behavior.
- Risk management matrix: risk management is its own discipline within the world of trading. A risk management matrix is a method used to compare multiple assets and evaluate the risk involved in buying or selling that asset. It’s a quick way to ensure that you’re following a plan and staying out of emotion-driving trading behaviors.
- Candlestick charts: common to trading platforms and discussions of trading principles, a candlestick chart is a graphical representation of the opening, high, low, and closing price for an asset.
- Moving averages: there are multiple types of moving average calculations, each designed to reveal a different aspect of an asset’s aggregate price movement. Analyzing the crossover of different moving average calculations can offer traders a signal for entry and exit points on a trade.
- Relative Strength Index (RSI): the RSI offers a visual indicator for when an asset is overbought or oversold. These conditions provide traders with an indication of where the price might move next and what type of trade they should enter into.
- Bollinger Bands: another charting tool, Bollinger Bands offers another point of confirmation when determining if an asset is overbought or oversold and whether or not it’s about to enter into a reversal.
The short-term trader’s toolkit goes beyond, but if you master these essential tools, you’ll be well on your way to become a successful trader. Which and how you use at what time, well, that’s up to your strategy.
Short-Term Trading Strategies to Profit By
If you want to become a professional trader, you have to put theory into practice. Short-term trading is an unforgiving profession in a very real sense: if your trades fail, you lose money. And if you run out of money, you can’t trade. It’s that simple.
The best thing new traders can do is develop a sound trading plan and stick to it. This will guide your trading, but it will also help regulate emotions and avoid compulsive trading behaviors.
And while a robust strategy is the key to success, be flexible enough to know when change is due. As you grow and evolve as a trader, so should your strategy. But it should always be there to back your decisions.
Beginner Strategies
New traders encounter these strategies as they study and speak with other traders. You don’t need to master every trading technique, but you should try them all to find which ones work for your style.
News Trading
Most traders—including advanced ones—do this at some level. By monitoring the news cycle, you can spot pivotal announcements, natural disasters, and economic trends that will trigger price volatility. You have to pay close attention and move fast when something big hits.
Range Trading
Often, an asset will develop “support” and “resistance” levels, meaning that the price fluctuates within a range. Support is the relative low point, and resistance is the relative high point. When the price reaches support, it can be a good buying signal, while resistance can offer a strong selling signal.
Scalping
Armed with lightning reflexes and decision-making ability, scalpers capitalize on small price fluctuations across many trades in a single day. Scalpers look for assets with high liquidity so they are not forced into an unprofitable buying or selling price.
Technical Analysis
Short-term trading demands that you drink from a fire hose of information. Charts and technical analysis allow traders to separate noise from signal quickly. As you develop your pattern recognition abilities, you’ll spot opportunities more quickly and be better positioned to make a profit.
Momentum Trading
Trading terms like speed and momentum may seem odd to outsiders, but they’re incredibly useful. The trend is likely to continue when an asset develops enough momentum in a given direction. Trend length varies but can allow for multiple buying and selling cycles to generate additional profit.
But all good things end, and professional traders watch like hawks for any signal that the trend will reverse—the goal is to exit before it does.
Breakout Trading
Based on the principles of support and resistance, assets can also “break out” of those levels. A breakout might indicate a developing trend or simply a new “normal” range.
Being the first person to identify a breakout is a tried and true method for generating a profit, whether that’s short or long.
Advanced Strategies
No trading strategy or technical indicator is foolproof, as price action and asset liquidity follow localized patterns, not universal laws. This means that even the most experienced trader loses money on a bad break or false trend—that doesn’t mean your strategy isn’t working.
Once you acknowledge this and you’ve mastered the fundamental short-term trading strategies, you can incorporate more complex techniques. They require more knowledge, but fundamentally, more experience.
Pairs Trading
This strategy may seem counterintuitive: it involves taking two correlated assets, say oil company stocks, and trading one long and the other short. The relative price movement between the pair can generate a profit.
Contrarian Trading
When the market zigs, sometimes the best thing to do is zag. Contrarian trading requires a refined sense of when an asset is likely to reverse direction. Technical indicators can help you spot the signals, but trading experience is essential for effective contrarian trading.
Time and Sales Analysis
By working with real-time order flow data, you can judge market sentiment and discern opportunities as they develop. Buy and sell orders offer helpful clues about an asset’s momentum in a given direction. Reading these clues accurately requires the wisdom and insight that only experience can provide.
Algorithmic Trading
Because it requires advanced software programming and an understanding of the underlying principles, algorithmic trading is practiced by an elite cadre of traders, sometimes referred to as quants (short for quantitative). This approach can be highly profitable because computers can crunch data and execute trading orders quickly and accurately.
High-Frequency Trading
Essentially scalping with algorithms, this approach uses cutting-edge trading technology to execute high-speed trades (measured in millionths of a second) on small price discrepancies.
High-frequency trading (HFT) isn’t something that most short-term traders have access to, but some estimates suggest that HFTs make up between 35-60% of all trades.
Swing Trading
Swing traders develop the skills and techniques to hold assets across multiple days or weeks. This requires patience, discipline, and a strong understanding of short-term trends that fall in between day trading and investing.
Event-Driven Trading
Similar to news trading, event-driven trading requires more research and anticipation of market sentiment for certain events. By studying a few companies over a long period of time, a trader can get a feel for how the market reacts to industry or company-specific news, such as product launches or earning reports.
Statistical Arbitrage
Along with algorithmic trading and HFT, statistical arbitrage is a strategy practiced by quantitative traders and those with a strong head for advanced math. It uses statistical models to identify discrepancies between related financial instruments so that traders can capitalize on the difference.
One Short-Term Trading Strategy Doesn’t Fit All
Curious about the best strategy with the highest win rate? Short-term traders will argue over that until they’re blue in the face. It’s a matter of preference and practice—the strategy you have the most experience with is the one you’re most likely to prefer.
Regardless of your strategy, every trader should use backtesting and a trading simulator to validate the plan.
In backtesting you use technical analysis on historical price data and test whether your proposed entry and exit points would have generated a profit or not.
Once you’ve backtested a trading strategy, you use a trading simulator on real-time price data (but without using real money) to see if it works going forward.
Even the most experienced traders will backtest new theories and conduct multiple simulated trades to ensure everything works as planned. Often, traders use the same trading simulation software for both activities.
How to refine your day trading strategy
Creating and choosing a trading strategy is not enough. You need to refine it in a certain period, typically a few months before you apply it in real markets. Therefore, you need to adjust the strategy on the way, because market conditions are constantly changing.
Some of the things that you can do to make more efficient your strategy are to spend a few months working also in the demo account, or look at how other pros approach the markets. Doing this will help you identify its pros and cons without risking your own money.
Success in Short-Term Trading Doesn’t Happen Overnight
If all the talk of strategy feels overwhelming, don’t worry. We don’t recommend that you jump into the deep end and expect to swim like Olympic gold medalist Katie Ledecky. You have to start with the fundamentals, building confidence and skill.
Learn, practice, and start with short-term trading strategies that work.
One of the best things you can do if you’re considering a career as a trader is to join a prop trading firm such as Real Trading. Prop trading firms provide you with the training, tools, buying power, and support that you need to become a successful short-term trader.
You don’t need a pile of money or a degree in advanced math, either! You just need the drive to win and a willingness to learn.
