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Short Term Trading: Is It worth it?

Posted on June 25, 2010 by StockTrading.net | No Comments

Short-term stock trading has relinquished its niche position of the preferred
mode of trading by the financial institutions, banking professionals and
equity fund specialists. However, the arrival of online trading on the
scene coupled with the apprehensions  lingering in the market for too
long have made short-term trading popular amongst beginners.

Short-term stock trading is the practice of buying and selling of positions in a very short span of time which may range from as little as five minutes to a few weeks.  Short-term traders aim to capitalize on small movements of a stock, investing at a higher interest rate and getting the returns as soon as
possible. However, in the volatile world of stock markets, where the
world may turn upside down in minutes, short-term traders aim to square
off their positions by the time the markets close for that particular
trading day. The short term trader is akin to the better in a horse
race. The rules are simple: Don’t hold on to your horses for long. It is
the art of making money by exposing one to the market as less as
possible while keeping an eye out for the smallest changes. The
different styles of stock trading include scalping, swing trading and
momentum trading.

Short-term trading is the way to deal in stock trading
if one belongs to the breed who believes in making money in a jiffy.
The smaller size of price movements involves smaller risks. In the
course of minutes even the sharpest movements won’t reach more then a
hundred points. The smaller size of the positions is a succor to the
traders who have a smaller level of risk tolerance. The higher yield
rates coupled with the easy liquidity in short-term trading enables this
to act as a cushion for the long-term investments in an investment
portfolio. This also dispenses off the smaller monetary engagements. As
most of short-term trading involves the closing of positions before the
market closes for the trading day, the opening stock prices of the
following day do not make any impact on trading. Short-term trading is a
lifesaver in bearish market conditions as one can make profits by
short-selling in falling prices.

On the other hand, the intrinsic randomness of short-term trading makes it
less predictable. The unstructured nature makes short-term trading a
matter of getting proper chances. As the positions often change in a
short span of time, it is necessary to deal in volumes in order to make a
substantial profit. With higher yield interests comes a higher risk.
Higher commissions paid to the broker also erode a lot of profits made
in short-trading.

While long term trading is a safer bet, with a meticulous approach and a
awareness of the risks involved in over trading, traders can make a
substantial profit from short-term trading.

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