Vary short-term trading styles include day trading and scalping strategies. These trading styles are very stressful and require a lot of patience, focus and commitment. To succeed, you need to be in front of the markets to make a profit.
Day trading, also called intra-trading, is a style of trading where you open and close your trading positions within a day. With scalping trading it’s all about taking advantage of very small price changes within seconds or minutes like you can see on the below chart.
Many traders like these strategies, as it seems to be a very active and easy way to make money every day. Another advantage is that you can close all your positions before the end of the trading day, meaning that you’ll avoid paying rollover fees, as well as any unpleasant big market moves during the night.
Short-Term Trading Features
Short-term trading can be very profitable, but it can also be very risky. It’s essential that you spot good trading opportunities, while properly managing your risks. Controlling your risk is one of the most important aspects to trading if you want to be successful in the long-term. To protect your positions, the most commonly used tools are stop-loss and take-profit using support and resistance levels.
Another important thing is to recognize the right trading situations from the ones you should avoid. Too often, traders think that they fully understand what’s going on in the markets because they read financial papers or listen to the news. So, before you enter the market, be sure that you get a sense of the market participants’ psychology and the main trend.
To know if an asset is trending up or down, you can use different tools and technical indicators. Traders often use moving averages (MA) to have a quick view of the trend. An upward trend occurs when prices are above the MA. Conversely, a bearish trend happens when prices are below the MA.
Many traders look for overbought and oversold situations with the RSI or Stochastic oscillator to enter the market. For instance, when the RSI is below the 30-level, it shows an oversold level, indicating that prices might be about to reverse and trade upward. On the other hand, when the RSI is above the 70-level, it shows an overbought level, indicating that prices might be about to reverse and trade downward. For more information about this indicator, read our article: Trading Strategies Using the RSI Indicator.
They also use other mathematical indicators, such as the MACD or moving average crossovers to get short-term trading signals. We will not cover them in this section, as we talked about in other articles that you can check here.
Traders often use basic chart patterns to spot short-term trading opportunities. They assume that the price action describes the market participants’ nature and psychology. If you analyze the price action, you realize that they often come back with the same shape – it’s what we call patterns. Pattern recognition trading is a very powerful tool in Technical Analysis. You can find different kind of chart patterns: continuation, reversal and indecision patterns.
To construct this pattern you will typically use 2 trend lines that converge. Usually, triangles are continuation patterns, but you can sometimes find them as reversal patterns.
There are different kinds of triangles, such as symmetrical, ascending and descending. With the following Investopedia pictures, you can see examples of every triangle: a symmetrical triangle, an ascending and a descending one.
As a continuation pattern, an ascending triangle is a bullish sign and happens on an upward trend. On the other hand, a descending triangle is a bearish sign that appears in a downward trend. Usually, prices tend to accelerate when they exit the triangle.
Flag & Pennant
The flag & pennant patterns are usually considered continuation patterns. The flag has the shape of a rectangle, as you can see on the following chart. On the other hand, a pennant is very close to a triangle.
With a triangle, prices are evolving against the main trend within 2 trend lines. The support and resistance levels create a rectangle within which prices evolve before heading back in the main direction. For instance, if the initial movement is an uptrend, then prices will go down for a moment before rising again, like in the picture above.
Pennants follow the same rules as flags, but they look more like symmetrical triangles. However, prices in pennants do not need to touch the trend lines several times, such as within a triangle. Usually, a strong price rise/fall happens before prices slightly correct within a pennant pattern.
This pattern is a reversal pattern that appears when prices are about to reverse and move against the previous trend. You can find 2 different versions of the head-and-shoulder pattern. The chart shows a head-and-shoulder top that signals that the price of the asset is about to fall. It usually appears at the peak of a bullish trend.
The other kind is a head-and-shoulders bottom, also called an inverse head-and-shoulders, which appears during bearish trends. It usually signals that prices are about to rise. The construction of these 2 head-and-shoulder patterns is similar: a shoulder, head, and another shoulder as well as a neckline.
The last one has to be broken to confirm the formation of the pattern. Prices usually accelerate when they break the neckline. It’s from this level that the target price can be computed. The 1st thing to do is to measure the distance between the neckline and the head. Then, you can report this distance from the neckline and place your take-profit order around that level.
Double Bottom & Double Top
With this reversal pattern, prices are trying to continue the existing trend, but fail to do so. Often, the double bottom pattern is compared to a W, while a double top pattern is compared to an M, as you can see in the following chart:
A double bottom signals a reversal in a downtrend. Prices moving down will find a resistance level preventing them from going further down. On the other hand, a double top signals a reversal in an uptrend. Prices moving up will find a support level preventing them from going further up.
Another variation of this pattern is the triple top and triple bottom. They work the same way as the double top and double bottom, but prices need to be tested 3 times at the support or resistance level, before breaking the neckline and reversing.
Cup & Handle
This pattern is a bullish continuation pattern that looks like a cup where prices paused before continuing their upward movement. The upward movement preceding the pattern is an important feature in validating this pattern.
Another important component that completes the pattern is the formation of the handle. After rising on the right side of the cup, prices should fall within the handle that looks like a flag. In theory, prices are supposed to retrace 1/3 of the previous upward movement.
As you can see, there are a lot of different strategies and tools you can follow to get short-term trading signals. With these chart patterns, you can visualize a change in the supply and demand relationship, which is a shift from buyers to sellers, and vice-versa. Take advantage of it!
You can use them to find profitable entry points either to follow the main trend or to anticipate a reversal in prices. Always consider the following adage before you enter the market – “the trend is your friend”.
Chart patterns associated with candlestick analysis will be very helpful to spot profitable short-term trading opportunities. You will then be able to better check market movements and recognize possible price accelerations or indecision moments.
Among the most used candlestick short-term patterns, you will find the doji, the bullish and bearish engulfing, the hanging man and the hammer. To know more about these candlestick patterns, read our previous article: Candlesticks 101 – Why You Should Use Candlesticks In Your Trading.
Finding the right trading style
Finding the right trading style and strategy is essential to be successful in trading, but confirming buying/selling signals is very important as well. Simple Technical Analysis tools can be used, such as trading volume, trend lines, and support and resistance levels. They will help you improve your analysis and get better trading results, thanks to the more accurate entry and exit levels that you’ll be able to pinpoint using these tools.
Always be patient, dedicated and well organized while trading. Short-term trading doesn’t mean that you have to trade every single day. If the markets do not offer any profitable and clear trading opportunities, don’t try to create any opportunities that aren’t there.
Following your trading plan will help you avoid trading out of boredom or impulse.