Short-Term Trading Ideas

As a trader, you must be able to capitalise on short-term trading opportunities to be successful. Fortunately, there is no dearth of such opportunities in the Indian financial markets. In this article, we are going to look at some short-term trading ideas you can consider implementing to increase your chances of profitability and success. But before we explore the various trading ideas, let us quickly go through the concept of short-term trading. 

What is Short-Term Trading?

The basic concept of short-term trading is to generate profit by exploiting price movements that occur in assets in a brief time period. The typical holding period of short-term trades ranges from a few minutes to a few days. 

Unlike long-term investing, which focuses on the fundamentals of assets and their potential for growth over extended periods, short-term trading focuses primarily on technical analysis, market sentiment and volatility.

To capitalise on price fluctuations, traders leverage various financial instruments such as stocks, derivatives, currencies and commodities. The key to success in short-term trading lies in accurately reading market indicators, swiftly identifying entry and exit points, and effectively managing risk.

Short-Term Trading: An Example

Now that you are aware of what short-term trading entails, here is a hypothetical example to help you understand how it works. 

Assume there is a company, ABC Limited, whose current stock price is Rs. 670. The company recently announced its quarterly results, which surpassed the market’s expectations. Anticipating a surge in volatility surrounding the favourable earnings report, you decide to employ a short-term trading strategy. 

You purchase 100 shares of ABC Limited at Rs. 670 per share. As you expected, the share price rose sharply to Rs. 750 on the back of the good quarterly performance over the next couple of days. Since your profit target for the trade has been achieved, you decide to sell the 100 shares of ABC Limited at Rs. 750 per share. This will net you a profit of Rs. 80 per share. 

Useful Short-Term Trading Ideas That You Can Implement

If you are interested in investing in stocks for the short term, it is advisable to make yourself aware of some strategies. Doing so will enable you to make well-informed trading decisions without taking on too much risk. Here are some useful short-term trading ideas that can help increase your chances of success.

1. Range Trading 

Markets need not always trend in a particular direction. Sometimes, they may move within a specific price range. Range trading is one of the most useful short-term trading strategies you can implement when the markets don’t exhibit any clear trend and are moving within a range. 

The strategy involves identifying the price range within which an asset oscillates. Once the range is established, traders purchase the asset near its support levels and sell it near its resistance levels. The difference between the support and resistance levels would be the profit.  

2. Breakout Trading

Breakout trading also involves using the support and resistance levels of an asset. However, unlike range trading, traders who use this trading idea wait for the asset to break out of the support or resistance levels before initiating the trades.

If the asset breaks out of its support level, traders take a short position on the asset. On the other hand, if the asset breaks out of its resistance level, traders will enter into a long position on the asset. Once their profit targets are achieved, traders exit by squaring off their respective positions.

3. Scalping

Scalping is a fast-paced and high-risk short-term trading strategy that involves making multiple small trades throughout the day. Unlike other short-term strategies, the average holding period of scalping ranges from mere seconds to minutes. 

The primary objective of scalping is to capture the minor price movements in an asset that occur throughout the trading day. Traders employing this strategy must execute trades with tight spreads and quick order placement to capitalise on price movements. 

Since traders don’t hold onto their positions for more than a few minutes, the profit potential of their trades usually tends to be low. However, they make up for the low per-trade profit potential by making a large number of trades in a day.

4. Swing Trading

Swing trading is another short-term trading idea that you can implement. It focuses on capturing short- to medium-term price swings within an established trend. Traders employing this strategy enter into a position depending on the price swings. 

For instance, if an asset is trending upward, traders will wait until there is a pullback or temporary price correction. At this point, they will enter a long position and ride the momentum of the trend until it exhausts or reverses. 

5. Event-Based Trading

Event-based trading is one of the many trading ideas that short-term traders commonly use. It involves capitalising on the spike in volatility caused by significant market events such as earnings announcements, economic reports or geopolitical developments. 

Traders analyse the potential impact of these events on asset prices and position themselves accordingly to profit from the ensuing volatility. The example that we saw in the previous section is a classic case of event-based trading.

Conclusion

Short-term trading provides traders with an array of opportunities to profit from rapid market movements. However, although it can be lucrative, short-term trading carries inherent risks. As a trader, you must ensure that you navigate these risks carefully by employing strict risk management measures, such as position sizing, stop-loss orders and hedging. 

Furthermore, you must ensure that you use technical analysis when planning short-term trades. By using technical indicators and chart patterns, you can identify the right entry and exit points for your trades. 

The Research 360 platform, powered by Motilal Oswal, can help you with the technical analysis of stocks. On the platform, you can view a host of technical indicators and information for every single stock listed on the exchanges. 

The list of indicators available on the platform includes Pivot Points, Moving Averages, Moving Average Convergence Divergence (MACD), Beta, Relative Strength Index (RSI) and more. Additionally, you can also identify stocks with good short-term trading potential using the ‘Stock Screeners’ feature of the platform. Sign up for the Research 360 platform today and leverage the various features it offers to elevate your trading experience.