Short term trading refers to any
trading strategy, in the stock or futures markets, where the duration between
trade entry and exit ranges between a few days and a few weeks. Although this
form of trading can be very lucrative, it is also very risky. Therefore, in
order to be successful when trading in this term length, you must understand
the benefits and challenges of what you're doing. Knowing how to spot good
trading opportunities isn't enough: You must also learn how to protect yourself
from unforeseen events.
One of the main benefits of short
term swing trading is the fact that your capital is only at risk for short
periods of time. Therefore, if you make the wrong decision on a trade, you will
know it within a few days or weeks. This gives you the opportunity to free up
your capital for new, high quality opportunities. In addition to the short
period of risk, trading in the near term has lower capital requirements than
long term trading which often requires a sizable amount of capital.
When trading like this, the expected
risk/reward profile of a trade can easily be determined. This is because in
swing trading, the profit targets and the risk are both well defined. With such
clarity and consistency, it is easy to plan where you will exit the trade and
the maximum amount of time you plan to spend in the trade. Last among the
benefits, is the ability to use "bracket orders," which enable you to
place entry orders, stop losses and profit-taking limit orders simultaneously?
Short term trading is not without its
disadvantages. To begin with, trading in the short term is expensive. This is
due to the high trading costs which are brought about by the short holding
period and the frequent trade entries and exits. In addition, risk management
in short term swing trading can be quite challenging. Holding a position over a
longer period of time is in itself a risk management and loss-limiting
strategy. However, since as a short term trader you do not have the option of
holding a position for a long period of time, you must learn to use momentum
and volatility to your advantage.
Despite the above mentioned
challenges, short term trading can be very beneficial to a portfolio especially
when it is combined with long term trading. Diversification of portfolios
enables traders to improve their overall risk/reward balances.
By Jeremy
B Thompson
