Short-term forex trading refers to going in and out of the same currency pair and making transactions involving the same currency pair. A trade can last from a few seconds to a couple of days. The objective is to cash in on tiny profits that arise from minor fluctuations in the prices. This kind of trading does not take a long time, and the market is watched very carefully.
In my beginner years, I realized I had to master two skills: technical and fundamental analysis. Technical analysis is based on reading charts and identifying trends, in order to make your guess for the next price movement. You do this with the help of tools such as moving averages. If you're interested, here are some ways to identify trend direction. Fundamental analysis is the analysis of the news and what effects it has. Factors such as political turmoil or unstable peace bring about fluctuations in currency valuations.
There are several modes for trading short-term, including scalping, day trading, and swing trading. I've attempted all these modes of trading. I felt scalping was too swift for me. It involves executing far too many trades within minutes. Day trading was preferable to me in that you deal a little bit longer outside the market. Day trading is a form of trading where the position is kept for a few hours and is expected to be liquidated later. In swing trades, you are in a position for a few days but eventually exit pretty quickly too.
Due to the fact that it allowed me lots of time to think but did not force me to sit around for too long, I was at ease with day trading the most. If you have never traded, a practice account should be the first thing you do to establish what type of trading best fits you.
5 Best Short Term Forex Trading Tips and Tricks
1. Scalping Strategy in Forex
Scalping is the form of trading that is commonly regarded as high-speed trading. When you scalp, you will conduct numerous transactions where you try to earn a single pip each time. You may only hold a position for a few seconds or minutes. The simple strategy is that the entire day, one puts in as many trades as possible so as to take as many marginal profits as possible.
When for the first I tried working with the scalping strategy I understood that this is very concentration demanding. It is very essential that you focus on the activity in the market at all times. Many times a slight increase or decrease in the price would mean nothing, however, when used with leverage these ideas can turn the dollars into large numbers. Therefore, you have to do this fast and try to close your trades after making a minor profit which is normally a few pips. A pip is known to be the smallest incremental price change in forex and if you carry out enough trades, these small increments can be useful.
I also learned that choosing appropriate currency pairs is essential in scalping. A scalper would wish to trade in pairs where their liquidity is high namely the EUR/USD as this allows for quick market entries and exits. The spread or difference between the buy price and the sell price dominates. The smaller the spread is, the lower the cost of the trade is, hence a higher percentage of the gains are kept.
This moneymaking option called scalping is not for me because it is too hectic and requires one to be moving all the time. But if you like action and you can concentrate on one thing for a long period it may be a good strategy to take. In this case, however, it should be emphasized that it is wise to commence with minimal trades and to take a demo account first for practice purposes.
2. Day Trading Techniques
Day trading activities involve the selling or buying of currencies and making dispositions the same day without carrying out open positions overnight. The focus is aimed at taking advantage of the many small price changes that occur within one day. When I took the plunge into day trading, the ability to devote a number of hours on the market and still come out of it at the end of the day is what thrilled me.
One such system, which I found very effective, is known as momentum trading. That is, you look for strong price movements and follow them. For example, if a currency is gaining value thanks to some news, you wait for the highest point and sell. The trick is to pay attention to the news and look up for those moments when sudden peaks develop.
Lastly, the use of pivot points is another way to day trade. This Forex day trading strategy uses the daily price range which is obtained by calculating the highest and lowest price of a currency pairs within a day. So you look for a low point to buy at and a high point to dispose of your assets at. This strategy was quite difficult for me because it was rather impossible to predict the points which would be the highest and the lowest.
You can not just trade aimlessly as I have understood while I was day trading. You must have a set entry and exit for every trade, and you must have stop-losses at all times. A stop-loss is a level at which you will automatically liquidate any currency assets, to prevent excessive losses, if the market falls below certain levels.
Unlike scalping, day trading is relatively more manageable since many decisions are not needed too quickly. However, it still requires concentration and very fast reflexes. Those operators who are beginners should first work with a demo account, not trade significant amounts of money, and try to open and close positions.
3. Swing Trading Strategies for Short-Term Success
There’s yet another trading style and this one takes more time than day trading or scalping though it is definitely a short-term approach. In swing trading, the trades are held for a few days, up to one week at most. It is focused on catching those movements which take place within several days and have greater fluctuations. It’s better than both fast and slow trading in my opinion of swing trading. It allows enough for me to think through my trades but I do not have to wait endlessly to see results.
Swing trading is simply about riding the trends. This means that as a trader, you are looking to enter the market, to trade in it, when the price is trending in one direction. One of the indicators I work with is the Moving Average Convergence Divergence indicator or MACD. It makes it easier for me to determine whether a trend is starting, or it is nearing an end. For instance, when the MACD line crosses above the signal line this is usually a buy signal and vice versa.
The other tool that I have been using is the Relative Strength Index (RSI). The RSI is credited with showing whether a currency has been overbought or oversold. Specifically, when the relative strength index is above seventy, it means the currency is purchased too much and therefore is likely to go down. When the index is below thirty, it means that the currency is in a high sell-off and will possibly increase soon.
One of the things I have experienced with swing trading is the need to be patient and not to get into or out of a trade until the condition is perfectly right. Once in a trade, there are times when the market does not seem to move as fast as I would like it to, and I have to restrain myself from scaling it back. People who like to analyze a trend but are not in a hurry to execute the deal will be able to use swing trading. As usual, one should start with smaller volume trades and utilize a practice account before proceeding to live trading.
If you're wondering about different types of moving averages and how they play a role in trend identification, you might ask, Is EMA better than SMA?. Understanding the difference between these indicators can help you choose the right one for your strategy.
4. Essential Forex Indicators for Short-Term Traders
As a novice trader, I was able to note quickly that making use of indicators is very fundamental in short-time frame trading. Such tools assist in forecasting the possible next market direction. Others may be more inclined to patterns, while other types look at the momentum direction or velocity of movements. I have to share some of the indicators that I found particularly helpful while carrying out trading over very short time periods.
It is worth noting that one of my favorites is the Relative Strength Index (RSI). Its purposes are more complex than it seems so easy. Such indexes help to analyze whether a certain currency is bought too much or too little. A reading above 70 indicates that the currency may be overbought and may reverse downwards very soon. When below 30, it means that the currency has been oversold, and a price reaction is probable. This indicator goes a long way in helping me know the best time for entering or exiting trades, especially when I am anticipating changes in market trends.
Another powerful instrument is the Moving Average. I prefer the exponential moving average (EMA) since it weighs the more recent price fluctuations. Moving Averages help eliminate erratic price data that helps find price patterns. For instance, when the short moving average cuts across the long moving average from below, it is time for bullish trading. When it does vice versa, it is time to exit and take short positions. It is not complicated and helps to assess whether a trend is strong or weak. You can learn more about Ways to Identify Trend Direction with different methods and tools.
Others include the Stochastic Oscillator. This indicator aids me in determining if the price momentum is increasing, decreasing, or grossly in place. It is helpful in determining market reversals. When stochastic lines are above 80, then the price is likely to be overbought, and a sell-off could occur. When it is below the 20 reading, then it is likely to be undersold, and a rally may be imminent.
My trading experience has really changed after integrating these indicators. They won’t make you a successful trader overnight, but they do enable you to make better decisions. Consequently, I advise that you practice using them on a demo account to understand how they work before venturing into real trades.
5. Risk Management Techniques
The thing that has particularly resonated with me over my years in forex trading is the need to implement risk management. As for all strategies regardless of how excellent they are, there are always some unfortunate outcomes. It is essential to avoid situations whereby those unfortunate occurrences lead to the complete evaporation of one’s trading capital. When I first started trading, this was not something that I took very seriously and I paid for it in a rather painful manner. That being said, there are a few steps that I now take to protect my trades which I will explain below.
To begin with, I do not execute any trade before placing a stop-loss. A stop-loss is an order that will close out your losing trade once the market makes a significant unfavorable turn. This protects you from losing capital that is above what you are willing to lose. For instance, say I want to buy a currency at 1.2000, I will probably place a stop-loss at 1.1950. This means, that if the currency price goes down to 1.1950, my trade gets closed, so I do not lose other amounts of money that I do not wish to.
One rule that I follow and which is also very important is that I should only put a small amount at risk proportional to my account size in a single trade. So, I will risk an amount that is not more than 1-2% of the total account balance in any trade. This keeps me from losing too much on a single trade which can potentially wipe out the account. Even if I have more than one or two trades that I lose in a row, I know that I will not be losing too much capital. This rule has prevented me from making some great errors in this business.
Another thing I have developed is to keep my emotions in check while trading. After losing a trade, it’s tempting to feel bad and hurry in to make the money back quickly by purchasing more. But this usually ends badly. In order to calm down and focus, I’ve had to learn how to stick to my trading plans and not be emotional about them. I’ve also learned that when it’s a bad day, the most effective measure sometimes is to walk away from the computer.
In the end, I also want to mention that every time I employ risk management techniques I engage in the process on a demo account for practice purposes. This way, I am able to practice my technique and can rest assured that I am actually containing the risks.
Conclusion
After a while, I have come to understand that a good trading strategy alone is not enough for one to be successful in short-term forex trading. The right mentality is just as important. When I was getting into the trading business, I was only very interested in strategies such as scalping, day trading, and swing trading. With time, however, there began to be more and more experiences about how much of a yes manager of emotions is just as important as a manager of all things trading.
One of the biggest mental scars that I dealt with was loss. In the initial phases, I hated making a loss and lost track of reason and wanted to get back into the market almost right away and try making back that loss. However, this would only result in poor decisions and worse losses than the ones that were sustained. I have somehow come to terms with the fact that loss is an element on it’s of Forex trading. I follow a sane trading plan and do not make hasty decisions when I feel that things are going against me.
In today’s world, patience has also been something I have grown into. Whether it is waiting for that ideal setup while day trading or whether it is holding a swing trade for a few days, I have realized the importance of remaining patient and in control and acting only when the time calls for it. Most of the time, trying to force the trades even when I know the market doesn’t present any good opportunities ends up losing money for me.
Moreover, I have also started implementing the strategy of avoiding trading for a while after I have lost money. Being away from the computer for some time gets my mind off it and allows me the chance to come back to it focused. As such, this is the reason why it is crucial to control that pressure as trading is likely to inflict damage on oneself over time.
All in all, I think that for a person ever to be successful in trading, he or she requires a good game plan together with the appropriate frame of mind. While having such attributes, I have managed to enhance the quality of my trading and remain steady in the market. For those who are only beginning in this field, I advise them to concentrate on their attitude equally as they do on mastering new tricks.