Ready to start trading short-term stocks? Here are a few tips to consider:
Do Decide the Type of Trader You’ll Be
Take your time constraints and tolerance for risk into consideration to find a style of trading that best suits your needs and goals. Common types of short-term traders include:
- Scalpers: Scalpers try to profit from small changes in price by opening positions that last between only a few seconds and a few minutes. You try to make frequent small profits by entering a trade and then exiting as soon as the market moves in your favor. As an extremely time-intensive strategy, scalping isn’t for someone who wants to trade part time.
- Day Traders: As a day trader, you would buy and sell assets within one trading day. Successful day traders know how to make quick decisions to efficiently get into and out of trades.
- Swing Traders: This type of short-term trader takes a position within a larger move. Positions can last for a few days to a few weeks, sometimes even longer. Swing trading can take advantage of medium-term movements.
Do Learn About General Market Cycles
Knowing about market cycles can help you figure out when to watch the calendar. Since back in 1950, stock market gains have tended to occur between November and April. Averages tend to be relatively static between May and October. You can use cycles to your advantage when deciding whether you should enter long or short positions.
Do Watch Moving Averages
A moving average is just the average price of a stock over a specified time period. You’ll usually see a moving average for periods of the following number of days:
All in all, moving averages can show you which direction a stock is trending. That, in turn, can inform your decision about trades you should (or shouldn’t) make.
Pitfalls to Avoid
There are also a few “don’ts” to keep in mind when you’re jumping into short-term trading:
Don’t Overlook the Tax Differences
Generally speaking, if you hold an asset for over a year, you’ll get taxed at the lower long-term capital gains rate. If you hold that asset for a year or less, though, your capital gain or loss is considered short term. That means your short-term gains from stock you buy or sell within a year will be taxed as regular income, and you’ll pay taxes on those gains at the higher rate.
Don’t Use Short-Term Investments for Long-Term Goals
You’ll want to carefully consider your goals for investing before you start, as short-term and long-term stocks serve very different financial purposes. If you’re saving for a long-term goal like retirement, you won’t want to take the risks that come with short-term trading strategies. On the other hand, if you’re looking to get income for a short-term goal like a down payment on a house or buying a car, short-term trading could work (as long as you’re okay with the inherent risk).
Keeping these dos and don’ts in mind will get you ready to take the plunge into short-term trading.