What does it take to master short-term trading? Since this strategy can last for a few minutes or several days, a trader should understand its facets. To know the fundamentals, one should differentiate a profitable and loss trade. And to do so, he should equip himself with the right amount of knowledge and skills.

Let this article walk you through the basics of short-term trading.

A trader should determine a good potential situation and avoid the bad ones. However, many investors are caught up in the moment and believe they can be and stay on top of the game if they monitor the evening news and read the financial pages. Keeping up with the markets go beyond those. How to pinpoint the right trades at the right times?

  • Watch the moving averages – Moving average pertains to the stock’s average price over a given time period. The most common time frames include 15, 20, 30, 50, 100, and 200 days. This indicator shows whether a stock is moving upward or downward.
  • Understand overall cycles or patterns – Markets trade in cycles, so it is important to watch the calendar at specific times in order to find the right time to enter into long or short positions. Since 1950, most of the stock market gains have surfaced between November and April, while averages are almost static between May and October.
  • Grasp market trends – Consider purchasing with very little shorting if the trend is positive. Otherwise, you can do shorting and very minimal buying. By doing so, the chances of the trend going against you can be reduced.

Controlling risk is one of the most significant aspects of a successful trading. Risks are inevitable, but it can be minimized by putting sell stops or buy stops. Sell stops is an order to sell a stock upon reaching a predetermined price. Buy stop is the opposite, which is employed when the stock escalates to a specific price. In other words, both orders aim to limit your downside. When it comes to short-term trading, one must set the sell stop or buy stop within 10% to 15% of where you purchased the stock or began the short to keep losses manageable.

Aside from containing risks, various indicators are in place to figure out the suitable time to purchase and sell. The relative strength index (RSI) and the stochastic oscillator are two of the well-known buy and sell indicators.

RSI assimilates the stock’s strength or weakness. A reading of 70 implies a topping pattern, a reading below 30 signifies an oversold stock. On the other hand, the stochastic oscillator is utilized to find out whether a stock is expensive or cheap by looking at its closing price range over a given time period. A stock is overbought if the reading is 80, a stock is oversold if the reading is 20.

Then, there’s patterns, reflecting the change stock price movements and changing expectations. It can develop for days, months, or years. Although no two patterns are similar, these are very close.

The following are some of the important patterns to watch:

  • Double Tops – Prices will escalate to a specific point on heavy volume, then retreat. The point will be retested on reduced volume, and a decline will occur, making the stock head lower.
  • Double Bottoms – Prices will drop to a particular point on heavy volume, then climb and fall back to the initial level on lower volume. Prices will begin to increase when it fails to break the low point.
  • Head-and-Shoulders Pattern – Considered one of the most trusted patterns, prices will rise and subsequently descend. Then, it will soar above the previous peak and stumbles again. And, prices will ascend, but not to the second high, and plunges once more.

Studying indicators. Understanding risks. Analyzing Indicators. Evaluating patterns. These are the keys to mastering short-term trading.