Short-term trading can be very profitable. However, it is also connected with high risk. Such kind of trading attracts traders with the possibility of quick money. Unlike medium-term and long-term trading, short-term trading focuses mainly on fast decisions to buy or sell. In this article JustForex team evaluates all nuances of this type of trading activity.
While short-term trading, orders are opened in a short period, from several minutes to several days. Traders make a profit by conducting trades on lower timeframes. Short-term trading usually takes place during the most volatile periods. Trades are mainly driven by technical analysis. At the same time, you should never forget about fundamental analysis.
The following styles can be referred to short-term trading:
- Scalping – this method is considered to be the most aggressive. Scalpers earn on short price movements, the duration of the transaction ranges from a few seconds to minutes. They mainly trade on M1 to M15 timeframes and execute up to several dozens and even hundreds of orders per trading session.
- Day trading – this method is used by traders who prefer trading within one day and hold a position for up to several hours. Day traders choose charts of M5 to H1 timeframes. Day trading is less risky and stressful compared to scalping. Profit is usually fixed at the end of the day.
To use scalping and day trading, it is necessary to have time in order to spend in front of the computer all day long. Short-term trading, as a rule, requires increased attention and a high tolerance for stress.
Short-term forex strategies
There are several forex strategies which are used for profitable short-term trading. Let’s consider the most popular.
1 – Support and Resistance
First, you need to determine the support and resistance levels on higher timeframes (M30-H1). At such intervals, significant support or resistance levels are formed. Therefore, you should identify such levels the first. Then it is necessary to switch to lower timeframes (M5-M15). Trading is conducted either on the breakdown of these levels or on a rebound from them.
The breakdown of the channel, resistance or support lines is a good option of trading signal. It is useful to stick to this strategy, especially for traders who are just starting trading.
2 – Moving Averages
Moving Averages is one of the frequently used technical indicators in the Forex market. MAs are indicators that help to forecast the direction of price movement, as well as determine dynamic support and resistance levels. Moving averages are referred to trend indicators: if prices are above the MA, the prices follow a bullish trend and vice versa.
Simple Moving Average (SMA) and Exponential Moving Average (EMA) are the main types of MA. The SMA is formed by calculating the average price for a certain period. It allows traders to confirm the trend. Compared to the Moving Average, EMA has a smaller lag effect and reveals a trend more likely.
For trading on short-term trends, JustForex team recommends using short curves. Forex traders often use a moving average crossover system to enter trades. It is formed with a slow MA and a fast MA. When the slow MA breaks above the long one, prices are likely to reverse and increase.
Experts also recommend using moving averages when there is a pronounced trend in the market.
3 – Moving Average Convergence Divergence (MACD)
The MACD indicator is an oscillator that allows traders to identify trends and to look for signals. Two moving averages and histogram forms it. MACD calculates the difference between fast and slow moving averages.
If the histogram crosses the zero level, it is necessary to consider a signal to enter the market. The MACD indicator gives a sell signal when it crosses the zero level from top to bottom.
4 – Candlestick Patterns
Traders look for reversal candlestick patterns and enter the market in the direction indicated by a particular candlestick pattern. The signal appears when the price breaks through the level of the candlestick pattern. Every trade should be protected by stop loss. The following technical analysis and Price Action patterns are the most popular among traders: Triangle, Flag, Pennant, Double Top/Bottom, Inside Bar, Outside Bar, Pin Bar, and others.
To succeed in short-term trading, the trader should adhere to money management rules. Short-term trading is associated with risk, so don’t forget to use stop losses.