Short-term Investing (aka Swing Trading)


Short-term investing is a term we use to describe a position trade, which may last anywhere from several days to several weeks, or even as long as a month or more.

Often times, those interested in day trading incorrectly assume that all trading must be completed on an Intraday basis and/or that all trades must be closed out by the end of the day. While this does often times, reduce the risk of holding overnight, or for durations longer than a single day, sometimes (not always) it can put you into a mindset which can tend to reduce your overall profits in the markets. Often times day traders find themselves “babysitting” cash while looking for favorable trades to place. While this isn’t always bad, it can sometimes tend to reduce your profits from trading.

If you keep an open mind about the markets, certainly it can be seen that there are times when holding a position for longer than a single day can be beneficial to your bottom line. Many times in our morning newsletter, for example, we take up a position early in the week and hold a stock for several days, if not longer. The reason for this is because while Intraday trades can be placed, often times slightly longer duration trades which are based more on technical chart patterns can turn out quite favorable if executed and managed correctly.

With this said, it should be noted that we are not prescribing a “buy and hold” mentality. If anything, you need to be “on your toes” just as much, if not almost more, with short-term investing as with day trading. Often times, profit taking and/or risk management needs to happen with just as much speed in positions held for multiple days as with trades made on an Intraday basis. The only significant difference is that while managing the trade, you also work to keep an open mind regarding the upside potential of the trade over an extended period of time.

In addition, you try to not be so quick to take profits and move on. Having additional patience, while perhaps protecting current profits (i.e. Using a trailing stop loss and/or taking some profits off the table) can result in quite spectacular profits if you find yourself on the right side of a trade which begins to advance in your favor. This is also true of short plays which begin to fall.

While short-term trading is something that tends to take some getting used to, the basic idea is that you want to attempt a trade in a stock which you feel may have additional upside if held longer term (again, when we talk “longer term” we may only be referring to a week or several weeks). Typically, these would be slightly lower risk stocks which have basically more reliable or predictable longer-term charts behind them.

In addition to being careful regarding which stocks you select for short-term investing, you also want to select your entry points extremely carefully. It also tends to be more important to watch the overall market and how it is trading in relation to the stock you select, in an overall effort to give yourself a more or less favorable backdrop against which to hold your position. Likewise, using an “average in” approach where you buy limited shares at first to test the waters can be quite helpful. Typically, unless you are quite familiar with the stock and/or company, buying a stock which is tending to move favorably for you over time (rather than one which is going against you) will produce the safest and most favorable results – as long as you do not over pay in relation to the ultimate price target.

This is not to suggest that cost averaging cannot or should not be used in some cases, however, again it is best to stick with companies that you are more comfortable with.

Finally, as noted above, if the position does start to move in your favor, some form of risk reduction should be considered. This can either take the form of a trailing stop loss (we would recommend placing the stop some place slightly below the most recent breakout level and/or at a point which would tend to indicate a breakdown in the chart) and/or through taking some profits off the table. In this area, often times if you can take out your original investment, then the remaining shares can be held basically with no cost basis and therefore no risk.

Regardless of how you actually go about managing positions which are held longer than a single day, or whether you even combine short-term investing with your normal day trading at all, the basic idea here is to at least consider and keep an open mind to holding [at least some] stock(s) as slightly longer short-term investments when the potential upside and benefits may outweigh the risks of being invested in the markets.

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