Short-term trading refers to the trading of stocks and other securities over brief periods of time, such as a few weeks or months. Short-term trading should not be confused with day trading, where stocks are bought and sold within the span of one trading day. In general, those who practice short-term trading rely heavily on technical analysis and tools such as charts and graphs in order to make decisions about how and when to place a trade. This differs from a strategy of fundamental analysis, where an investor will research a company’s earnings, history, management, balance sheet, labor relations and other “fundamental” factors before purchasing or selling the company’s stock.
An investor who uses short-term trading has little practical use for fundamental analysis because of the time and effort involved in it. A short-term trader is much more concerned with where the price of a stock is at the moment, and where it is going in the near future. It is often easier for a trading novice to become familiarized with technical tools such as charts and algorithms than it is to learn what makes a company strong and therefore a good long-term investment. Because of this, short-term trading is very popular, especially in times when stock markets have a general upward trend.
In practice, it can be difficult to be successful over long periods of time in short-term trading. Market volatility and lack of discipline can erode a trader’s profits and confidence very quickly. It is possible to see success in short-term trading, as many have done. However, this usually only comes after mastering trading techniques and cultivating the ability to be emotionally detached from one’s trades.
One very common type of short-term trading is swing trading. This consists of buying a stock with the hope of taking a profit within a few days or weeks. The ideal environment for swing trading is when the market is not exhibiting any particular trend, but will go up for a few days and down for a few days, alternately. A swing trader aims to take advantage of these fluctuations, with no regard for the fundamentals of the underlying company, since these don’t normally change over a period of days.
Position trading involves holding a stock for a few months, or perhaps as much as a year. A position trader, as opposed to a swing trader, has a somewhat long-term outlook. In this case, fundamentals can be important to consider, especially if they indicate the potential for a rise in price which may not fully play out for months. While still considered a type of short-term trading, it is not usually subject to the level of risk associated with day trading or swing trading.