Short-term investing is a strategy that aims to open and close positions in a short period of time, typically days or weeks, but it can be even less. This trading strategy is popular among retail and institutional traders who want to profit from small price movements and short-term trends.
In general, short-term trading is a more speculative trading method than traditional investment methods. This article will go over a variety of short-term trading strategies, such as scalping, intraday, and swing trading, as well as how to get started with short-term trading on our online platform, as well as any costs and risks involved.
An Overview of Long-Term vs. Short-Term Capital Gains
A capital gain occurs when you sell a capital asset for more than its original purchase price. Stocks, bonds, precious metals, jewelry, and real estate are examples of capital assets. The capital gain tax you will pay is determined by how long you held the asset before selling it. Long-term capital gains are taxed differently than short-term capital gains.
Short-term investing frequently involves the use of derivative products such as spread bets and CFDs. These enable you to open a buy or sell position based on whether you believe the asset’s price will rise or fall, and you will profit or lose depending on which direction the market moves. Short-term trading on our platform also necessitates the use of leverage, which provides greater exposure to financial instruments but comes with numerous risks. If the market becomes volatile and you incur a loss, the loss will be calculated using the full value of the position, regardless of your margin percentage. This means you could lose more than 5 times your deposit.
When selling an asset, keep capital gains taxes in mind, especially if you dabble in online day trading. To begin, any profits you make are taxable. Second, you may have heard that capital gains are less taxed than other types of income, but this is not always the case. As previously stated, it is dependent on how long you owned those assets before selling them.
Whether you trade in the short or long term determine by a variety of factors, including your overall trading goals, the amount of capital you are willing to spend or risk, and your personality type. All of these factors can influence the outcome of your position.
Short-term investing methods
Short-term investing: Scalping
Scalpers profit from small price changes by opening positions that can last from seconds to minutes, but usually not longer. It is by far the shortest trading style on this list. A scalper’s goal is to make small profits as often as possible by entering a trade and exiting it as soon as the market moves in its favor -‘scalping’ profits off the top of a market trend. It is the polar opposite of the concept of “letting profits run.” To maintain a high win-loss ratio, these traders take profits and cut losses as soon as possible.
Because scalpers conduct a significantly greater number of transactions than day traders or swing traders, for example, the risks of trading are magnified. This is due to the increased likelihood that the trades will fail and you will have to bear the losses, even if the stake or position is smaller.
Short-term investing: Day trading
Day traders buy and sell assets in a single trading day to avoid paying overnight fees. This is a short-term trading style because it seeks to profit from minor market movements by trading frequently throughout the day.
This style entails making quick decisions in order to enter and exit trades quickly and efficiently. Even within a single trading day, there can be significant volatility, which is required to create a favorable trading environment but also creates risks to be aware of. Rapid price changes, for example, can cause slippage.
Day trading strikes a balance between extreme short-term strategies such as scalping and longer-term strategies such as swing trading. These traders may use hourly charts to analyze price data and identify recent emerging or declining trends in order to determine whether to buy or sell a financial instrument. When they notice that their chosen market is trending in the wrong direction, they can exit the position quickly to avoid losses.
Short-term investing: Trading in swings
Swing trading is a short- to medium-term trading strategy in which traders hold open positions for several days or weeks. As the name implies, traders may examine the swing highs and swing lows of an asset’s price to determine whether it has future profit potential.
Swing traders will try to spot a trend and profit from the ups and downs in the overall price movement. They will frequently use technical analysis to determine the best entry and exit points for each trade.
Swing trading is still considered a short-term trading style, but there is no timeframe that limits it. In theory, it could also be classified as a long-term trading style because the trend could last for several weeks.
Trading the Short-term investing trend
Short-term investingand long-term trading strategies can both benefit from trend trading. In this case, a short-term trend trading strategy would focus on trends that appear on price charts for a few minutes, hours, or days but do not last long.
A short-term investing trend following strategy is based on the expectation that the price of an asset will continue in its current direction and will not reverse for the duration of the position. Traders typically look to buy an asset (go long) if it is trending upward or sell the asset (go short) if it is trending downward.
Traders on our platform can use trendlines, which are part of our draw tools, to help identify emerging or reversing trends on a price chart. These can also aid in identifying breakouts from a previously steady trend. A variety of chart timeframes can be used to analyze short-term trends.
How to Trade Short-Term
- Create an account. A live account will first provide you with access to a demo account, where you can practice short-term trading with simulated funds.
- Choose between spread betting and CFDs as your product. Spread betting is our most popular derivative, and it allows you to trade in the UK tax-free.
- Look through our selection of financial markets. Over 10,000 financial instruments are available in the forex, share, commodity, index, and treasury markets.
- Choose a trading strategy for the short term. Scalping, day trading, and swing trading are all popular options, each with its own set of advantages and disadvantages. Momentum trading, reversals, and breakouts are also notable strategies.
- Brush up on your technical analysis skills. When analyzing price data, chart patterns, technical indicators, and support and resistance levels can be useful.
- Implement risk management controls. Stop-loss orders, particularly GSLOs, can be useful in limiting losses when trading in volatile markets. You should keep a close eye on your positions throughout the trade.
Short-term forex trading
In this example, we’ll use a forex scalping strategy to speculate on the USD/JPY currency pair’s price movements. This cross is commonly used in scalping because it is one of the world’s most traded forex pairs, resulting in high liquidity and, at times, volatility.
The chart below depicts several opportunities for a forex scalper. The candlestick chart has been modified to show 30-second intervals, which is a common viewpoint for this type of trader. Buy and sell signals (created with our drawing tools) have been added at potential entry and exit points for the trade.
When the bars turn green for a number of consecutive days, this could be the start of a rapid upward price movement, so scalpers could open a buy position in the hope that the price will continue to rise. When the bars begin to turn red, it indicates a price reversal, and scalpers may decide to short-sell the currency pair to avoid losses. Scalpers can repeat this action several times throughout the day in order to profit from small price movements measured in pips.
In this example, we will use a day trading strategy to speculate on Goldman Sachs’s share price movements. Day traders require liquidity and volatility, which are typically available during the stock market’s opening hours and the final hour before close. A 15 or 30-minute chart is a popular timeframe for day trading because it allows traders to analyze price action as well as emerging or breakout trends. Once again, the chart below has been labeled with possible entry and exit points.
As you can see, the day’s uptrend is relatively stable. Day traders may open a buy position at the start of the trading day and then close it to avoid carrying it over to the next day.
This strategy works well for avoiding overnight slippage and gapping on stock charts. Goldman Sachs’ share price rose from $294 to nearly $297 between the previous day’s close and the opening price, as highlighted in yellow above. The share price then dropped overnight from $308 to $303 at the end of the current trading day. This means that traders who carry over positions may suffer losses as a result of unexpected price changes for which they did not plan or set a stop-loss.
short-term investing commissions
When using our platform for short-term investing, there are a few fees to consider. Margin trading requires you to pay only a fraction of the asset’s full value upfront, known as a deposit. Depending on the asset class, this can vary in percentage. For example, our forex rates begin at 3.3% for major currency pairs, the lowest margin rate on our platform and our share rates begin at 20%. The following fees are also applicable:
- Spreads: These are built into the instrument’s buy and sell prices and will appear on your order ticket when entering values.
- Holding costs: Any trades that are carried out overnight, such as swing trading, will incur holding costs. These are calculated at the end of each day and are based on your instrument’s applicable holding rate.
- Commissions: only apply to share CFDs when entering and exiting a trade. The commission rate varies depending on the country from which the specific share is issued.
Best technical indicators for day trading
short-term investing: One of his well-known observations was that nothing new happens in the financial market. Everything that occurs has occurred previously. As a result, any wise investor must examine the history and make decisions based on it.
Ray Dalio, who runs the world’s largest hedge fund, has also noticed this. Dalio observes that the market is cyclical in his theory of how the economic machine works. This means that the market will most of the time fluctuate up and down.
short-term investing: To make trading/investment decisions, a trader must always use Moving Averages. Even the world’s most successful investors use moving averages to make trading decisions. Mark Burton hosts a session called ‘battle of the charts’ on Bloomberg television. He usually bases his analysis on Moving Averages. Simply put, if the best investors use these tools, why shouldn’t a regular trader?
What really matters as a day trader is the timing and type of moving average used. Long-term investors, for example, use longer time periods in moving averages, with 200 days being the most common duration.
Index of relative strength
short-term investing: The relative strength index (RSI) assists in identifying overbought or oversold levels for security by comparing its relative strength or weakness to other assets in the market. In general, a reading of 70 indicates that an asset has been overbought, while a reading of less than 30 indicates that it has been oversold. By looking for divergence, failure swings, and centerline crossovers on a trading chart, the RSI can also introduce buy and sell signals for short-term traders.
short-term investing: This is yet another momentum oscillator developed in 1950. It displays the close’s position in relation to the high-low range over a predetermined number of periods.
Simply put, this oscillator tracks the speed of the price rather than the price and volume. Stochastics is usually set to 14 periods by default. It assesses the close’s position in relation to the high-low range over a given time period.
Day traders must use short time frames. It is typically between 0 and 100. Readings above 80 indicate that a security is trading close to its period range. Readings less than 20 indicate that the security is trading at the low end of its range.
Software for short-term investing
short-term investing: Our Next Generation online trading platform was created specifically for short-term traders. We offer a variety of chart types and timeframes to suit your strategy, whether you want to practice scalping, day trading, or swing trading.
The software also includes a plethora of technical trading tools, such as indicators, drawing tools, a chart pattern scanner, a client sentiment tool, and other helpful features to get you started. More information on trading with the award-winning Next Generation platform can be found in our platform trading tutorials.