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Tips and Tricks for Short-term Traders

Tips and Tricks for Short-term Traders

 
 
A short-term foreign exchange trader usually aims to make small to moderate
profits and initiates many trades over a given period. The most popular
short-term periods for forex trading are the M30, M15, M5, and M1.
 
 
 

 

Short-term traders are of two types: scalpers and day-traders. 

Scalping is a popular technique that involves entering and exiting trade multiple times a day. A trader who does scalping is known as scalper. 

While scalping compromises of taking several positions in a day, day trading is an approach that concludes trades at the end of the day. Whether he/she is a profit or loss, a day-trader would always exit his/her positions when the trading session ends. 

Now that you have understood the concept of short-term trading, it's time to move on to tips and tricks for short-term traders. In this guide, we are going to present useful instructions for short-term trading, so if you are a short-term trader, stick with us until the end. 

 

1. Entering at the right time

Many traders and investors enter short-term trading in hopes of making quick profits. While it's achievable, taking the position at the wrong time can do severe damage. 

Entering at the right time means that you know good and bad situations. If the market is volatile, it's better to watch the market, and then enter. Many times, traders watch the news and take positions, but many of those figures have been achieved when they enter the trade. So, it's all about entering the right trades at the right time. 

 

2. Understanding market trends

If the overall trend is negative, you may consider short positions and refrain from going long. Conversely, if the trend is positive, you may consider buying and avoid going short. When the overall market trend is not in your favor, you have to wait and enter at the right time. 

 

3. Recognizing trading cycles

As the forex market operates round the clock, it's vital to recognize markets at certain times. For example, when the London session begins, you may consider buying GBP/USD or EUR/GBP. As a trader, identifying critical cycles to enter long or short is really important. 

 

4. Technical analysis

Technical analysis involves evaluating and studying the forex market using previous movements and price patterns to predict the future. For technical analysis, you can choose either technical indicators or finding different chart patterns as a part of short-term trading.

 

Technical indicators

There are plenty of indicators that determine the overall market conditions and whether its right to enter the trade. Two of the most popular ones include the RSI (relative strength index) and Stochastics. 

The RSI compares the relative strength or weakness between currency pairs. Generally, a reading of 70 indicates an uptrend, while a reading below 30 shows a downtrend.

The Stochastic oscillator works similar to RSI. It describes the strength of a currency pair based on its closing price over a certain period. When the Stochastics is showing a reading of 80, it is an overbought condition, and when the reading is at 30 or below, it is an oversold condition. 

Both indicators can be used for selecting a currency pair. However, they should be used in conjunction with other forms of technical analysis.

 

Chart patterns

Another tool that can help short-term traders are chart patterns. Patterns are specific illustrations on charts, and they develop over several days, weeks, months, or even years. They are used to forecast the price fluctuations of a currency pair. 

Some of the important patterns include:

a.   Head and Shoulders: 

The head and shoulders are considered one of the most reliable patterns. It emerges as a reversal pattern in an uptrend or downtrend. 

b.   Triangles: 

The triangle is a continuation pattern and surfaces in an uptrend or downtrend. It further categorizes into three types; ascending, descending, and symmetrical. 

 

Short-term trading strategies

Here are key trading strategies every short-term trader can apply:


1. Support and resistance

Trading support and resistance levels are some of the best ways to trade the forex market in the short-term. This technical approach aims to look for important levels on the chart and trade breakouts from the levels. 

If the price action breaks the support level down, you should go short. If the price breaks the resistance level upwards, then you should engage in a long trade.

The risk management rules in this trading strategy are elementary. Just place your stop loss outside of the level you are trading. For example, if you are trading to buy after a resistance breakout, you should put a stop order below that resistance level. If you are trading short after a breakout of support, you should place your stop above that support area.

You must use the price action rules to determine the optimal exit from the trade. With a short-term trading approach, you want to get out of the trade quickly and make sure you don't turn your short-term trade into a long-term position.


2. Riding the trend

The rules of this short-term trend trading strategy are straight-forward. If you see a forex pair bouncing off the trend line for the third time, then a trend is emerging, and you should try to trade this pair in the direction of the emerging trend. 

Your stop-losses should be located outside the swing you are using to open the trade. When the price moves in the intended direction of your trade, you can manually adjust the stop-loss so that it sits tightly on the trend line. You must keep your trade until the price action breaks the trend line. When a breakout appears, you must close the trade. 


3. Going against the trend

For this strategy, you will look for reversal candlestick patterns and enter in the direction indicated by the specific candlestick pattern. For example, the head and shoulders pattern. Your short-term trading signal will appears when price breaks the "tip" of the candlestick pattern.

An excellent place to put a stop-loss would be on the opposite side of the candlestick pattern you are trading, including the wicks.

 

Conclusion

Short-term trading involves applying various tools and methods to make money. The best tip is to first educate yourself and then apply all the above steps and strategies.  

HIGH RISK WARNING: Foreign exchange trading carries a high level of risk that may not be suitable for all investors. Leverage creates additional risk and loss exposure. Before you decide to trade foreign exchange, carefully consider your investment objectives, experience level, and risk tolerance. You could lose some or all of your initial investment; do not invest money that you cannot afford to lose. Educate yourself on the risks associated with foreign exchange trading, and seek advice from an independent financial or tax advisor if you have any questions. Any data and information is provided 'as is' solely for informational purposes, and is not intended for trading purposes or advice.