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 forex 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.
Is forex good for short-term trading? Short-term forex trading 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 forex 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 every trade and take action 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.
What is the best strategy for short-term forex trading?
The forex market (foreign exchange) attracts thousands of new traders every day who hope to gain quick wealth by trading. Unfortunately, most of these individuals do not succeed in making a profit. Having a trading style or strategy that suits your personality and your trading objectives is important if you are going to succeed as a forex trader. When you do so, you’re more likely to get positive results and avoid making mistakes.
1. Day Trading Strategy
Day trading is a trading strategy that focuses on buying and selling currency pairs within the same trading day. It is a short-term forex 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.
Here’s how to achieve consistent profit in day trading for a living guide.
2. Scalping Strategy
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, they can lead to significant losses if not executed carefully. So scalping is a short-term forex 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.
6 Tips for Short-Term Forex Trading Strategies
The dark side of short-term forex trading is that it can be risky, and not everyone can handle the volatility and stress associated with it. Following the rules of risk management and the following tips can help you survive.
- 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. 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 overleveraging.
- 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 them 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.
Long-term vs short-term Forex Trading: Which is best?
There is no absolute answer to this question. There is, however, one thing you can always count on. While short-term forex trading has a higher winning ratio and profitability, forex trading in the long-term has a higher compounding effect. According to the risk appetite and personality type of a trader, trading strategies may vary and work better for them.
The primary difference between long-term trading and short-term trading is the amount of time required to invest in the market. Short-term forex trading involves opening and closing a trade within a single day, whereas long-term trading may take months or even years. If you want to earn money every day, you must devote a couple of hours to watching the market.
Long-term investments are a great option to consider if you don’t have the time to constantly follow the market on a daily basis because of your day job. A disciplined approach, a consistent style, and a disciplined approach to trading are the keys to success in the financial markets, and all strategies are adaptable by those who use common sense and caution.
Mastering Short-Term Forex Trading With Technical Analysis
When it comes to short-term forex trading, 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 rate 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 are 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 breaches and continues 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 in an area or price range. They help identify possible areas where prices may change directions.
Candlestick Patterns: They are price patterns that are formed over time and are 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.
What are the Best Ways to Learn Technical 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.
Start Forex Trading
Are you ready to start forex trading? Open a forex account now or sharpen your trading skills using a risk-free demo account. Experience the most reliable trading conditions and infinite leverage account with one of the best brokers in the financial markets. AximTrade is an award-winning brokerage service provider, and the platform offers top-notch technology, competitive leverage conditions, the lowest spreads, and diversity of account types and investment capitals.
Also, make use of the full-fledged online forex course from AximTrade offering a fully interactive course designed by experts to help people become familiar with the forex market in an easy and convenient manner. This self-paced course allows you to learn forex at your own pace. By the end of the course, you will feel comfortable and prepared to start trading in real-time with full confidence.