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.