Long-term Trading vs Short-term Trading
Short-term and long-term trading is a profitable investment that comes with its risks. A long and short trade can be as short as a few minutes, or as long as days, depending on the trader’s plan. To become a successful trader in these trade strategies, you have to know the pros and cons that come with it. This trading strategy not only entails thorough market research, but also a careful approach. Before going into this type of trade, you must understand the basic ideas behind having a successful short-term and long-term trade. Learning the basics can boost your chances of having a profitable trade. In this article, we will evaluate short-term and long-term trading.
Short-term trading is also known as selling a trade. A short trade is a profitable trade that many traders indulge in. However, this type of trading requires a careful approach. Listed below are methods that can help in generating income from a short trade.
Knowing the right trade to speculate on
Knowing the right trade to open means that you can recognize a good trade and a bad condition to avoid. Most traders think that keeping updated on the market conditions via news outlets guarantees a successful trade. The issue behind this is that most markets are already affected by the news before it breaks out. To avoid this, some fundamental steps must be followed to ensure placing the right trades when due.
First Step: Observe the moving averages
A moving average is referred to as the average value of a trade over a particular time. There are several time frames but the most prominent timeframes are 15, 20, 30, 50, 100, and 200 days. The idea behind this is to observe if a trade is bullish or bearish. A good trade’s moving average should be bullish. However, if you’re looking to go short on a trade, the perfect trade’s moving average should be bearish.
Second Step: Have in-depth knowledge of the trade patterns
Normally, each trade has a pattern, this is why it is important to watch the pattern of a trade at a specific time. It’s been recorded that for a long time now, most trades have recorded high gains in November and April. It’s also been recorded to have a bearish moving average in October time frames. It is important to note all these trade patterns and put them into consideration when picking the right trade.
Know the market trends
Carefully observe the market trends to know if the trade is right. If the market trend is positive then it’s a buy trend, but when the market trend is negative, it suggests a sell trend. It is not advisable to trade against a market trend. Trading against a market trend drastically reduces your chances of making profits from a trade.
The above-mentioned steps have been tested and proven to help spot the right trades. Applying these steps to your trades improves your chances of having a successful trade.
Minimizing Risk should be the top priority of any trader. Note that Short-term trades come with a lot of risks, so controlling your risks is essential. Most financial trading firms have tools that can help minimize risks. Tools like Stop loss can help protect trades from market reversals. These tools are used by setting a price a trade automatically closes at, it could be a profit limit price or a stop loss. These tools help secure the equity of a trader by avoiding a margin call.
Technical analysis is known as the process of estimating and surveying trades or markets using the previous price and patterns of the market. This analysis is used to deduce future market trends. This is a top tool for short-term traders, it helps in ascertaining the right trades to place when the market is bullish.
Technical analysis is one of the most important factors that help a trader make the right trade decision. Most traders use this trading method. Technical analysis gives you the edge of staying ahead of the market trend. It helps you pinpoint a future trade reversal and other trading features.
Listed below are some tools and techniques that can be used in Technical analysis.
The trade chart is one of the tools that can help a trader know the right short-term trade to place. Chart patterns can be formed over years, months or days. However, each pattern is always different and can be used to indicate the price trend.
I am As a short-term trader below are some chart patterns to watch out for
Double Tops: A double top pattern is a very important pattern used to indicate a bullish trend in a trade. This pattern is formed when there is a rise in the volume of price, and then the price decreases to a former price level.
Double Bottoms: This pattern is the opposite of the double tops pattern. This pattern is formed when prices reduce to a certain point before decreasing, and then increase again to the same high point previously reached. This indicates a bullish trend.
Triangles: A triangle is a chart pattern used by traders to know when a trade is bearish or bullish. It is formed when the hugs and lows of a trading range reduce. As the trade range decreases, it indicates that the price trend could suddenly become bullish or bearish.
Head and Shoulders: This chart pattern is a price reversal pattern. It is used by most short-term traders to indicate a bullish trend in a trade.
Buy and Sell Indicators
Most traders use indicators to specify the best time to enter or exit a trade. There are a lot of indicators, however, the most used indicators are stochastic oscillator, and Relative strength index (RSI). The RSI correlates the relative potency or drawback of trade with other trades. When it comes to the RSI indicator, if the reading is at 70, it shows an overbought and bullish trend, and when it’s at 30, it indicates a trade is oversold and intends price reversal. However, the price of a trade can hover on the overbought or oversold signal for a long period.
The stochastic oscillator is used by Traders to indicate the value of a trade by using the trades closing price over a timeframe. If the indicator reads 80 it Shows an overbought trade, but if it’s 20, it shows an oversold trade.
However, these tools should be used together with other indicator tools to achieve a successful trade signal.
ADVANTAGES OF SHORT-TERM TRADING
Trading short enables you to make money faster. The profits of this type of trade can be realized within a short timeframe. Money can be earned within a day of investment.
If a short-term trade is not performing according to plan. The equity used in the trade can be reinvested in a new trade.
DISADVANTAGES OF SHORT-TERM TRADING
Und table market conditions
The volatilities of the market might affect a trader. Thereby, causing the trader to lose a substantial amount of funds during a short-term trade.
It is stressful
It is often difficult to anticipate market trends. Traders are often worried about the outcome of a trade and their capital. This alone can increase stress levels.
Short-term trades require full concentration. This type of trade can be time-consuming and needs so much attention. A trader who does short-term trading needs to constantly monitor the market to make good entry and exit trade points.
THE LONG-TERM TRADING
Long-term trading is also known as position trading, it’s the process of holding a trade position for a long time. A long-term trade lasts for a long time like for some weeks or some days.
Simply put, long-term trading is a trade that lasts for a long time, from months to years.
Several long-term traders prefer to use Fundamental analysis in their trades. They are mostly interested in the future expectation of their currently open trade. They are less bothered about the daily volatility. Their main concern is the fundamental factors that could affect the trade. Because this is a long-term trade their major form of analysis is the weekly, monthly, and daily charts of their trades.
Long-term Trading Best Practices
Every trader has their trading strategy, some major guidelines guarantee a successful trade in the financial industry. These rules are founded mainly on risk management and the Forex market conditions.
Listed below are some major ways that can be used to attain successful long-term trading.
Trade without emotions
As a trader, it is advisable to not trade with your emotions. Don’t let your emotions control your decision when it comes to your trades because they can affect your trade performance. Oftentimes it is difficult to turn poorly performing trades into successful trades. However, closing trades prematurely is not advised.
Irrespective of the trade’s outcome, do not change your trading plans. You must carefully choose the best tracing plan, and ensure to choose a stop-loss and profit target. Additionally, do a correct prediction of the price trends of the trade.
Use minimal Leverage
When opening a long-term trade, it is important to use minimal leverage. As we all know, Leverage is a double-edged sword, it can maximize your profits and Also maximize your loss. Minimal leverage is required to prevent the loss of equity. When the market moves in an unfavorable position, it can lead to a margin call if your leverage volume is higher than your margin percentage.
Pay Attention to trading fees
The main aim behind trading is to generate profits. Now, if that is defeated there is no point to it. Trading fees can however impede the anticipated earnings from trade. A Lot of brokers charge fees like spreads for trades, and also a holding fee. Put all of these into consideration before opening a trade, and evaluate all the expenses required. Ensure that the profits are generated to cover the cost of the trade.
ADVANTAGES OF LONG-TERM TRADING
You don’t have to constantly monitor your trades. Research is only required before the trade is open. After placing the trade, you don’t have to constantly monitor your trades.
No stress required
Long-term trades are not stressful to maintain, unlike short-term trades that require constant market monitoring. Long-term trades ignore all the current market trends and focus on future market trends
As a long-term trader, your payable tax is not as much as short-term traders. Long-term traders are required to pay 5%-15% tax, while short-term traders pay 20%-30% tax.
As a long-term trader, you will have the ability to reinvest your profits back into the market to generate more profits.
Long-term trading requires fewer trading fees
Normally, spreads are charged when a trade is opened and closed. Long-term trading does not require constant opening and closing of trades.
DISADVANTAGES OF LONG-TERM TRADING
Long-term trading requires a trader’s equity to be invested for a long period. When your capital is tied down for a long period, you are bound to miss out on other market opportunities.
Long-term trading needs an in-depth knowledge of the market sector. Before you open a long-term trade, you must carefully and thoroughly research the market and financial instruments. You can’t make hasty decisions as this will affect the performance of the trade.
Long-term trading requires a lot of patience, so one trades are open for years, this only means you need to be patient enough for the trade to materialize. If you don’t have patience it might lead to leaving a trade prematurely which could impede your profits.
In-depth research about the trade is required. In long-term trading, you can’t solely depend on graphs or charts. You need to do thorough research on the trade.
Long-term trading and Short-term trading can be seen as good forms of investment. A trader going into any of the trading methods needs to make sure it tallies with its trading strategy. You cannot have a trading plan for a scalper and be going into long-term trading. A thorough market analysis is required to ensure good and successful trades.