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Everything You Need to Know About Short-Term Stocks

W hen you’re investing in stocks short-term, you sometimes don’t have enough time to do proper research and think things over before making trading decisions. However, if you’re able to understand the nuances of short-term trading and manage your risks wisely, you can significantly increase your profit potential. Let’s look at the basics of investing in short-term stocks.

  • Short-term stocks are stocks that are only held for seconds to a year.
  • The three types of short-term trading include scalping, day trading, and swing trading.
  • You can make short-term trading work for you by finding the right stocks to trade, mitigating risk, and using technical analysis.
  • Some of the best short-term stocks to trade include Disney (DIS), T-Mobile US (TMUS), Humana (HUM), Progressive (PGR), and Procter & Gamble (PG).

What Are Short-Term Stocks?

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Short-term stocks refer to stocks that you decide to hold for a short amount of time, which can range anywhere from just a few seconds to a year. They’re an alternative to the more conservative buy-and-hold stocks, which you can hold for years or decades.

When making short-term stock investments, you should focus mainly on price action instead of the long-term fundamentals of the assets. This type of trading aims to profit from quick changes in market prices, so you need to be able to identify market volatility around important economic data releases, political events, and company earnings.

Short-term trading is also called active trading because it differs greatly from the strategy of investing in passive funds. It’s generally based on speculation, meaning it doesn’t necessarily involve the purchase or sale of the underlying assets themselves. Rather, traders who do short-term trading have a tendency to favor derivative instruments, which enables them to enter or exit trades without having to own any assets. Such instruments include contracts for difference (CFDs), options, and spread bets, all of which provide opportunities to profit from movements in market prices.

Types of Short-Term Trading

Before you start doing stock investment for the short term, you should consider which trading style you want to adopt. Depending on your time constraints and risk-tolerance level, you can choose from one of the three following short-term trading styles.

  • Scalping: Scalping is a form of trading that seeks to profit from small changes in prices by opening positions that last for only seconds or minutes. You have to make small profits as often as possible by exiting a trade immediately after the market moves in your favor. It’s the opposite of the practice of “letting profits run.” If you intend to be a part-time trader, scalping isn’t the right option for you because it’s very time-intensive. As a scalper, you’ll most likely have to rely on high-frequency trading to be able to execute multiple orders in seconds.
  • Day trading: Day trading involves buying and selling stocks within a single trading day, usually for the purpose of avoiding overnight costs. It’s regarded as short-term trading because it aims to take advantage of small price changes through frequent trading within a day. As a day trader, you’re required to make decisions quickly so that you can enter and exit trades efficiently. There can be high levels of volatility in a single trading day, which is necessary for creating an advantageous trading environment. However, this can also result in risks such as slippage.
  • Swing trading: Swing trading focuses on holding positions within larger movements, which can last for days or months. Since it capitalizes on medium-term movements, it’s the longest form of short-term trading. In swing trading, you’ll attempt to identify a trend and take advantage of the increases and decreases within the overall price movement. Typically, you need to perform technical analysis to determine the right entry and exit points for every trade.

How to Profit from Short-Term Investments and Stocks

Short-term investing in stocks is generally more difficult to master because it requires you to be more hands-on and make quicker decisions. Nonetheless, you can improve your chances of increasing your profits if you know the right way to trade short-term investment stocks. Follow these tips to become a successful short-term trader.

Identify the Right Stocks for Short-Term Investment

Recognizing the right stocks to invest in the short term means being able to determine which stocks have good potential and which are best avoided. Follow the steps below to find good stocks to invest in the short term:

  • Watch the moving averages: Moving averages are the average prices of stocks over specific timeframes. They show whether certain stocks are trending upward or downward. If you want to find a good stock to short, look for one that has a moving average that’s declining or flattening out.
  • Understand overall cycles: In general, markets move in cycles, making it essential to keep an eye on the calendar at certain times. For decades, most stock market gains have taken place from November to April, while the averages have been somewhat static from May to October. You have to know how to use cycles to determine the best times to enter into short or long positions.
  • Base your trades on market trends: If the market trend is positive, you should consider buying more and doing less shorting. On the other hand, if the trend is negative, it’s better to short more and buy less. When the market trend goes against you, the chances of having profitable trades drop.

Control Risk

The ability to minimize risk and maximize return is one of the most important skills for short-term traders. You need to learn how to do buy stops and sell stops to protect yourself against market reversals.

A buy stop is an order to purchase a stock when it reaches a predetermined price. When the price of the stock reaches the specified level, the order automatically becomes an order to buy at the current market price. A sell stop is the opposite; it becomes a sell order when the stock falls to a certain price.

Buy-stop and sell-stop orders are useful tools for limiting your downside. In short-term trading, it’s a general rule to set your buy stop or sell stop within 10% to 15% of the price at which the stock was purchased or the short was initiated. This can help you control your losses so that your gains will be significantly greater than the unavoidable losses you incur.

Use Technical Analysis

Everything that traders know about company earnings, management, and other factors is already accounted for in the price of a stock. If you want to stay ahead of other traders, you have to know how to use technical analysis.

Technical analysis refers to the process of using previous prices and patterns to study and evaluate markets or stocks in an attempt to make accurate predictions. It involves analyzing buy and sell indicators such as the relative strength indicator (RSI) and stochastic oscillator. Patterns in the stock market are also used in technical analysis, such as triangles, head and shoulders, double tops, and double bottoms.

Best Stocks to Invest for the Short Term

When trading short-term stocks, it’s important to buy a variety of stocks across different sectors so that you can diversify your investments and reduce your risk. Below is a list of best short-term stock investments:

  • Disney (DIS): The Walt Disney Company is a global entertainment company that comprises several different segments, including the Direct-to-Consumer and International division, studio entertainment, media networks, and amusement parks and resorts. It’s one of the best companies to invest in the short term because it shows strong growth potential through its earnings per share, direct-to-consumer segment, and the Fox assets it owns.
  • T-Mobile US (TMUS): T-Mobile US has been rapidly gaining market share after restructuring itself as the “un-carrier” in 2003. It managed to address many pain points of the telecommunications industry, such as inflexible device upgrades, expensive international roaming, and overage charges. Experts expect the company to deliver large returns of capital for its investors through share repurchasing because of its significantly expanding margins.
  • Humana (HUM): Based in Louisville, Kentucky, Humana is currently one of the leading health insurance providers in the United States. Experts recommend this company because of its involvement in the rapidly growing Medicare Advantage market and its main business, which is health insurance, is expected to see strong growth in the near future.
  • Progressive (PGR): Progressive offers many different types of insurance, including auto, RV, motorcycle, boat, home, and life. According to stock trading experts, the company is projected to continue experiencing rapid growth because of better-than-expected premiums and margins.
  • Procter & Gamble (PG): Procter & Gamble has been seeing an increase in market shares both in the United States and around the world after its expansion into other business segments. Additionally, it looks to benefit from lower commodity prices, which will result in a drop in material costs.

Investing in short-term stocks is a good option if you want to be actively involved in stock trading. Since it’s generally riskier than long-term trading, it requires you to have the necessary knowledge and discipline to make wise trading decisions. Nevertheless, if you can master short-term trading, you stand a chance of greatly improving your profitability.