Short-term forex trading is a very popular investing approach that involves holding trading positions for a short period of time. Despite being very attractive and lucrative, it can also be risky. For successful short-term trading, it is important to balance risk and reward for each trade. Understanding how to protect your trades and assessing fundamentals makes all the difference between profitable and losing short term forex trading.
What is Short-Term Forex Trading?
Short-term forex trading is buying or selling currency pairs over a short period of time. Trades can be held for minutes, hours or a day, usually not more than seven days. It is more appealing for traders who prefer quick profits, in spite of high risks. This approach can help in making smaller gains, and heavily relies on trading frequency. A trader can simply seize quick market movements all day long. At the end of the day, the cumulative profit can be very rewarding.
Advantages of Short-Term Forex Trading
- Quick Profits: trades are opened and closed within hours or a couple of days.
- Low Market Exposure: as trades are held for a short time, they are only affected by short term influences. The trader can get rid of losing trades and free the capital for reinvestment.
- Higher Profiting Potential: short term trading allows for capturing price swings in a timely manner.
On the other hand, disadvantages of short-term trading include:
- Stressful Trading: trading for short periods of time can be very stressful, as the trader should monitor almost each trade and take actions when necessary. It can be highly unpredictable.
- Time-Demanding: this trading approach requires more time to look for trading opportunities and enter trades at proper levels. A trader will have to closely and frequently monitor technical indicators and price charts.
- Higher Trading Costs: the more trades, the more commission and spreads you have to pay. These trading costs, especially when they’re high, can easily blow up your daily profits.
Short-Term Trading Strategies
Day trading is a trading strategy that focuses on buying and selling currency pairs within the same trading day. It is a short-term trading strategy where traders place a number of trades per day and close them by the end of the trading day, with no overnight positions which typically reduces exposure to market movements when the trader is inattentive to the market.
Although it is applicable in all markets, the day trading strategy is mostly used in Forex trading. It is mainly popular among retail forex traders. Day traders usually remain active over the day monitoring and managing trading positions. Also, they tend to set a daily risk limit, besides setting one for each trade so they can protect the trading accounts and capital.
Read more on forex day trading tips and strategies.
Forex scalping suits traders who prefer short-term, or those who like to seize instant price movements. Forex scalping focuses on accumulating small but frequent profits and trying to limit any possible losses. Despite the fact that these short-term trades would involve few pips price movements, when combined with high leverages, it can lead to significant losses if not executed carefully. So scalping is a short-term trading strategy that involves taking multiple small profits in a considerably short time.
Scalping traders need ultra-quick interaction with price movements as they usually enter and exit trades in maybe just seconds or minutes. This very fast-paced, and stressful, trading style may not suit everyone. Scalpers closely monitor price charts for patterns that can help them predict future exchange rate movements so they usually choose brokers with tight spreads, quick order executions, and minimal or zero-order slippage.
Short-Term Forex Trading Tips
- Trade Currency Pairs with Higher Liquidity: liquidity reflects how active the market is. It is how easily or quickly you can execute a trade and is determined by the total active traders and total trading volumes. Liquidity heavily impacts how volatile prices can be. The more liquid a market is, the lower volatile the price is. Forex major currency pairs enjoy high liquidity and lower price volatility. On the other hand, exotic currency pairs fluctuate more often due to low liquidity.
- Set your Risk Limit: it’s important to follow a strict risk management plan when it comes to short-term trading. Set your stop loss and take profit levels and never exceed your risk ratio per trade. Check out these steps for effective Forex Risk Management.
- Use Forex Leverage Wisely: always remember that leverage magnifies losses as well as profits. Understand how to apply forex leverage properly and avoid over leveraging.
- Calculate Trading Costs: these are the costs the trader endures in order to perform each transaction. This includes spread, commission and swaps for some accounts. Make sure you calculate trading costs per trade and compare it with potential profits.
- Focus on One Trade: avoid distracting yourself with multiple trades. Instead, focus on one trade at a time. Few profitable trades are always better.
- Measure your Performance: always keep a track of your trading history. This allows you to measure your trading performance every while so you can evaluate your progress.
Technical Analysis for Short-Term Forex Trading
When trading forex for the short term, it is better to mix technical analysis with fundamental analysis. Use technical analysis to identify entry and exit levels, evaluate price movements and detect price patterns. Meanwhile, fundamental analysis will help you consider economic factors that may affect your trade like data releases or interest rates decisions.
Trend Trading: It is a simple strategy as you buy when prices are rising and sell when prices fall. It involves checking longer-term charts to identify the trend. Once the overall trend is identified, trends in shorter time frames shall be moving in the same direction. Learn more on forex trend analysis.
Support and Resistance: Trading breakouts is very common. Support and resistance mark the levels or zones where you can enter or exit a trade. The price either reverses from these levels or breach and continue the current trend. If a pair’s price breaks support or resistance, the price often continues to the next level of support or resistance level or area. Support and resistance levels are not always exactly as they can be an area or price range. They help identify possible areas where price may change directions.
Candlestick Patterns: They are price patterns that are formed over time and believed to have a repetitive nature. It means that candlestick patterns are repeated every while and reflect the emotional reaction of the traders to the prices. They are used to recognize a trend continuity or reversal by reflecting the buying and selling forces.
How to learn Forex Analysis?
There are plenty of online resources to learn the basics of forex analysis. However, attending online courses and getting in touch with professional traders can help speed up the process. This will help you avoid common mistakes usually made by beginners. Read the detailed guide on how to learn forex trading.
The best way to learn forex analysis is to understand the key principles and apply that knowledge to demo trading.
Another method to learn is imitating professional traders until you get sufficient to trade on your own. Copy trading is a strategy through which a trader can copy a professional trader’s positions, either automatically or manually. This trading technique aims to follow professional traders who have a track record you would like to emulate. It is a way to automate your trading strategy. Copy-trading allows traders to monitor and learn from the strategies of successful traders. This technique best suits traders who don’t have time to keep up with the market or still lack the experience to trade profitably on their own. Learn more on how to Copy Trade with AximTrade.
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