Short-term stock market trading

When it comes to investing in the stock market, there are two different global strategies in terms of trading horizon with short term investment and long term investment. Here we will take a closer look at short term investing in stocks.  

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Short-term stock market trading

What is short term investing in stocks?

Short-term investment in the stock market is an investment that consists of taking a position on the price of these shares for a short period of time ranging from a few seconds to a few days. By definition, this strategy is therefore opposed to the long-term investment strategy which, generally and in the case of shares, consists of holding the shares as long as possible in order to generate dividends.

Thus, for short-term investments, it is important to analyze price movements, although fundamentals can also be used. Traders seek to profit from the fastest price changes and therefore look for markets with high volatility. Events such as economic data releases, company results or political announcements are often highly anticipated by short-term investors.

In stock market jargon, short-term trading is also called "active trading" as opposed to "passive trading" which represents long-term investment. We will thus retain here that the short-term investment is above all based on speculation. It is therefore not necessary to actually buy securities in order to resell them. The most frequently used method of short-term investment in shares on the stock exchange is that which uses certain specific instruments such as CFDs. These contracts make it possible to enter and exit a position without having to actually own the shares being traded.

 

What are the different methods of short-term investment in the markets?

As you can imagine, there are several methods of short-term investing that depend on each investor's time constraints, level of experience and risk aversion.

  • Scalping is one of these methods and consists of trying to take advantage of small price variations with very short positions ranging from a few seconds to a few minutes. Of course, the trader is looking to make small profits and to make as much as possible by opening and closing their positions successively and quickly. They try to capture gains or cut losses quickly by establishing a large win/loss ratio. Of course, this method of investing in stocks quickly and in the short term requires a lot of availability. It should also be noted that this method of trading can be particularly risky for traders who do not have the knowledge and experience to properly assess trends and volatility.
  • Day trading is another popular method of short-term investing in stocks on the stock market. It involves trading in a single day, which avoids paying overnight financing fees. Again, the objective is to try to profit from small market movements with a high frequency of trading. Traders who use this method must be able to make quick decisions without giving in to stress as intraday volatility can sometimes be very high which also implies high risks. Again, it is also necessary to devote a lot of time to the activity of investing in the stock market and to follow the markets throughout the opening of the trading session.
  • Finally, swing trading is the third most commonly used short-term investment method for stocks. Here, the goal is to take a position on a long movement that can last several days to several weeks. This method can also sometimes be compared to medium term investing because of this specificity. Here, traders who use this technique try to spot a trend in order to capitalize on upswings and downswings within an overall movement. Technical analysis is important here to try and determine interesting entry and exit points. Although it is a short-term investment method, swing trading has no particular time constraints and can even last for several weeks.

 

Short-term trading in the equity market :

While there are many markets that allow for short-term investing, we will only discuss the stock market here. But just know that if you decide to dedicate yourself to short-term investing, the trading hours of the markets will not necessarily have an impact on your methodology. The choice to trade one asset rather than another will therefore depend primarily on your personal knowledge and preferences.

When it comes to the stock market, it is important to choose the stocks you can trade in the short term. However, make sure that you only trade stocks that you know well or that interest you. Also note that while the stock market lends itself to short-term trading, it does of course also allow for longer-term strategies.

Here, you should also be aware that stock markets have specific trading hours and therefore volatility is reduced during off hours. However, the stock market is one of the most popular markets for traders who use this type of strategy. Here, most investors choose to close their positions at the end of the trading session, but it is possible to keep them open for several days.

It should also be noted that some brokers offer extended trading hours on stocks. It is therefore quite possible to speculate on these stocks in the short term outside market hours. But before you sign up with one of these brokers, remember to check this information if that is your intention.

Frequently Asked Questions

Is leverage advisable in short-term investing?

While it is of course possible to use leverage for short term trading, this tool is not recommended as it presents a risk. Indeed, while leverage can increase your gains on a short position, it also increases your losses in case of poor analysis and taking a non-winning position. If possible, you should therefore avoid using leverage.

What charts should I use for short-term investing?

The choice of the chart you are going to use for your short-term strategy is important. Indeed, it is essential to choose a chart that allows you to select an appropriate periodicity. For day trading for example, it will be preferable to choose periods of 30 minutes and less if you use another technique such as scalping.

What stocks are available for short-term trading?

There are many stocks available if you want to trade short term from a trading platform. Most of these are stocks that are part of benchmark stock indices such as the CAC 40 or the Dow Jones. Always remember to check the list of stocks offered by a broker before creating your account.

72% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. This is an advert for trading CFDs on Plus500