Short-term trading is a very different beast from investing. Where investing takes into consideration the current position of the market and its potential long-term outlook, short-term trading looks to capitalize on a quick price movement in a specific direction.
While that may sound simple in theory, it is a lot more complicated than you may imagine. In fact, if you want to be successful at short-term trading, it is crucial that you follow the right approach.
Predict When and How the Market Will Move
Being successful at short-termtrades requires one thing above all others: the ability to predict both when and how the market will move.
Most markets fluctuate in price on a daily basis – and predicting those small fluctuations is not only close to impossible, but also so small that there is little potential for profit. Instead, it is best to look for significant events that could potentially move the market in one direction or another – such as the release of certain data or meeting minutes, or a scheduled announcement.
For example, when the U.S. releases unemployment rate data – it could affect the forex markets related to the US Dollar. If the unemployment rate falls, it is indicative of a growing economy and the US Dollar will probably strengthen. On the other hand, if it rises, then the opposite will likely take place.
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As you can see, not only is the release of that data an event that you know will take place at a specific date, but its outcome can actually be predicted as well. While there are no guarantees, it is certainly still a lot better than simply attempting to make a blind guess.
In short, finding events that could potentially move the market, analyzing them, and then cashing in on the outcome is exactly what you need to do if you want to be successful in short-term trading.
Don’t Shy Away From Cutting and Running
At some point or the other, you are bound to make a prediction that doesn’t pan out the way that you expected it to. And when that happens, your trade is going to start to lose value – possibly quite rapidly.
In such situations, you have two choices: either accept your losses, cut them short, and move on to the next trade – or stick it out and wait, hoping that the market goes back in the opposite direction.
Often, one of the main reasons why short-term traders end up incurring losses is because they do not cut their losses short when things go bad. The temptation to ‘wait out’ the market is definitely going to be strong, but unfortunately, trying to do so is a huge mistake.
To be successful at short-term trading, you need to have a very low tolerance for losses and cut them short as soon as things go south. The best way to do that is to set up a stop loss order on the trades that you make, and not get tempted into shifting it if things go badly.
Nowadays, there are quite a number of financial derivatives that make short-term trading all the more appealing – and trading providers such as CMC Markets provide CFDs, spread betting, and binary option trading across numerous markets.
While the range of ways in which you can get into short-term trading may be diverse – the core idea remains the same. By developing the ability to find, analyze and take advantage of the opportunities that arise, you certainly stand to become a successful short-term trader.