Several basic concepts must be understood and mastered for successful short-term trading. These fundamentals can mean the difference between a loss and a profitable trade. Let’s take a look at these vital principles.Recognizing Potential Candidates
Recognizing the right possible trade will mean that you know the difference between a good potential situation and the ones to avoid. Most of New Traders get caught up in the moment and believe that if they watch the Blue Channels ie. CNBC and read the financial pages or stay on Social media they will be on top of what’s happening in the markets. The truth is, by the time we hear about it, the markets are already reacting. So, some basic steps must be followed to find the right trades at the right times.
Understand Moving Averages
A moving average is the average price of a stock over a specific period of time. The most common time frames are 20, 50, 100 and 200 days. The overall idea is to show whether a stock is trending upward or downward. Up-trending Stocks will have an increasing moving average that is sloping upward. If you are looking for a good short, you want to find an area where the moving average is flattening out or declining. (To learn more, read Moving Averages Part-1 and Moving Averages Part-2 .)
Understand the Market Trends
If the trend is negative, you might consider shorting and do very little buying. If the trend is positive, you may want to consider buying with very little shorting. The reason for this is that when the overall market trend is against you, the odds of having a successful trade drop even more.
Market is forming Higher High Its called Uptrend and Lower lows is called downtrend and Stuck in range is called Sideways.
Several indicators are used to determine the right time to buy and sell. Two of the more popular ones include the relative strength index (RSI) MACD and the stochastic oscillator.
The RSI compares the inside strength or weakness of a stock. Generally, a reading of 70 indicates a topping pattern, while a reading below 30 shows that the stock has been oversold.
The stochastic oscillator is used to decide whether a stock is expensive or cheap based on the stock’s closing price range over a period of time. You will see a reading of 80 if the stock is overbought (expensive); when the stock is oversold (inexpensive), you will see a reading of 20.
(MACD) was originally constructed by Gerald Appel an analyst in New York. Originally designed for analysis of stock trends, it is now widely used in many markets.
MACD is constructed by making an average of the difference between two moving averages. The difference of the original two moving averages and the moving average of the difference can be plotted as two lines, one fast and one slow
RSI and stochastics can be used as stock-picking tools, but you must use them in conjunction with other tools to spot the best opportunities.
Another tool that can help you find good short-term trading opportunities are patterns. A pattern is a change in direction up or down in the price of stock and reflects changing expectations. Patterns can develop over several days, months or years. While no two patterns are the same, they are very close and can be used to predict price movements.
Several important patterns to watch for include:
- Triangles: A triangle is when the range between the highs and lows narrows. These occur when prices are bottoming or topping out. As the prices narrow, this will signify that the stock could break out to the up- or downside in a violent fashion. (For more, read Trading Stocks with Symmetrical Triangle’s Chart Pattern How to trade Descending Triangle Chart Pattern and False Triangle Breakout)
- Double Tops: A double top occurs when prices rise to a certain point on heavy volume and then retreat. You will then see a retest of that point on decreased volume. At this point, a decline will take place and the stock will head lower.
- Double Bottoms: A double bottom is when prices will fall to a certain point on heavy volume. They will then rise and fall back to the original level on lower volume. Unable to break the low point, prices will then start to rise.Read More Here Chart Pattern -I
Short-term trading uses many methods and tools to make money, however, you must know how to apply the tools to achieve success using this type of strategy. If you can do this, you will be able to make money in both bull and bear markets while keeping your losses at a minimum and your profits at a maximum. This is the key to mastering short-term trading.