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Precious metals investment terms A to Z

Short-term Trades

Short-term trades are trades that terminate within a short period from their inception. They can be very profitable, but they are also very risky.

Eric asks:

Eric and Jill are at Jill’s kitchen preparing muffins. John comes in…

Prof. Jill, the Investor

Prof. Jill, the Investor

… five minutes and our muffins will be ready.
Eric, the Beginner

Eric, the Beginner

Oh. Hi, John.
John, the Trader

John, the Trader

Hello there. Did I hear that right? Five minutes? That’s a lot of time. You could buy and sell hundreds of stocks in the span of five minutes…
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Short-term trades can last as little as a few seconds or minutes. It is a very risky way of investing. For short-term trades investors use only a part of their capital, known as speculative capital. Being constantly in the market, they can only use a limited amount of money for each transaction.

What exactly is a “short term”? How short is short?
Short-term is a very relative term. For an investor trading in shares once every few years, short-term trading may mean buying a stock and selling it one year later. But for an investor pursuing a day-trading strategy, short-term trading may involve buying a stock and selling it a few hours or even minutes later. It is all very relative and depends on how the investor invests. For us, short-term usually means a holding period that is below one month.

Short-term trading means profiting on short-term price movements. This kind of behavior is known as trading and the person doing it is known as a trader. To find the right entry price, traders usually take advantage of technical analysis. They also try to be up-to-date with all the information concerning the markets, but often this may be in vain – by the time the general public hears about some news, the markets may have already reacted. In the case of long-term investment, sometimes just referred to as investing, investors pursue a “buy and hold” strategy (most investors will still like to sell before a major decline, though). They focus on fundamental analysis and try to find stocks or other assets that are in their opinion undervalued or have good growth prospects. Gold trading and gold investment  may appear similar at first glance, but they are actually two different approaches towards the market and one should pay special attention to different position sizing in both of them.

How do you make profitable short-term trades?

  • Use technical analysis. Watch support/resistance levels, Fibonacci levels, moving averages and indicators, and determine if a stock is in an uptrend or downtrend.
  • Understand repetitive cycles and patterns.
  • Keep up-to-date with all relevant information.
  • Never underestimate risk.
  • Use techniques and tools designed for a particular market – in general, the more customized these techniques are, the better.
  • Control your emotions and never give in to them. Make sure that you’re following trading/investment strategies that are in tune with your expertise and the amount of time that you can dedicate to studying the market.
  • When using someone else’s research for your trading/investments, make sure they are trustworthy.

Some people think, “only long term investing can make you rich,” while others claim “in the long run we’re all dead”. Which of these strategies is the right one? The funny thing is that they both are. Combining them both – diversification of strategies – reduces risk and increases potential profit.

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