Why Short-Term Trading Works Best For Newbies

Day-trading has a special place in the heart of a newbie, the idea you can sit at home each morning and pull out a living wage is the most appealing thing about it.

Equally as appealing is spending all day on the golf course as a ‘trend-trader’, not really having much to do at all, save read the occasional Wall Street Journal.

But both styles of trading are not suitable for the new trader unlike short-term trading.

This article is going to highlight a few reasons as to why that is.

 

On day-trading

Most beginners think of becoming day-traders at some point. But wanting to day-trade is like wanting to date a supermodel.

Only a very few of us are ever up to the task.

It’s understandable why many are attracted to the idea though. There are many perceived benefits.

Such as:

  • you get to ring the cash register daily
  • no risk of an overnight move against you
  • you get to feel like you’re actually doing a real job
  • the more trades you make, the more money you make

Of course, all this is hypothetical, because day-trading is probably the last approach you should be using as a newbie.

The reality is:

  • you need to maintain the discipline of a saint
  • losing money quickly is debilitating
  • intraday setups are not as accurate as daily or weekly ones
  • you might have to watch a screen all-day
  • you have to be on top of the daily news flow

If there is one reason above all else why CFD or Forex beginners fail it is because of day-trading.

End of.

At some point, we all have to mature and realise we aren’t likely to date a supermodel, and at some point, we also have to realise most of us aren’t cut out for day-trading either.

On trend-following

The other alternative is trend-following.

This is the exact opposite of day-trading in many ways:

  • discipline isn’t such as issue as a trade lasts over a longer period of time
  • any losses are easier to handle because you’re not losing it so fast
  • setups are more accurate
  • you can avoid most of the daily newsflow and random noise, and instead focus on the true ‘fundamentals’

After an attempt at day-trading, it’s reasonable why many then gravitate to the longer-term. Or vice-versa.

Unfortunately, trend-trading is equally as flawed for the beginner:

  • markets don’t trend most of the time. Up to 70% is spent going nowhere
  • you have to use wide stops that can be hard on the emotions

With trending markets only surfacing occasionally, many potential trend trades simply reverse before any real momentum can be established.

And, because wide stops are used, any profits disappear, leaving the trader completely demoralised.

This happened to me on countless occasions when I was a ‘trend-trader’, and it tests the discipline of the best of us.

With the addition of leverage, the situation is only amplified.

 

Short-term trading for beginners

My definition of short-term is anywhere from one day to ten days. Decisions are taken off daily charts, but 8-hour charts also work out well.

But the ultimate decider of whether you’re a long term, short-term or day-trader is how you exit a trade.

Trend-traders use a wide stop management system to account for market gyrations.

Short-term traders, on the other hand, use a tight stop management system enabling them to close out positions as the first major reaction occurs.

It’s called ‘short-term’, because the odds of holding the position after say, five days are slim.

But, on occasions as a short-term trader the market just keeps giving.

We just let our profits run.

Every short-term trader wishes an open position will be long-lasting but accepts most of the time it will not.

Trend-traders aim to catch the entire see-saw movement of a long-term trend.

Short-term traders, on the other hand, aim to capture just one tooth of the saw at a time.

The diagram shows a crude representation of this.

Two different approaches to trailing stops

The benefits of short term trading

  • you’re never be left sitting through a reaction having to endure fear-based emotions
  • you hit the cash register more often than trend-trading so can review performance on a regular basis
  • able to capitalise on the strongest part of an uptrend when markets are making higher lows day after day
  • able to capitalise on the best part of a downtrend when markets are making lower highs day after day
  • can capture short-covering rallies
  • can capture quick profit-taking declines
  • able to trade in sideways markets

That’s a lot of benefits.

 

Short-term trading trailing stop strategy

The timeframe of your trades is determined by your exit strategy more than anything else.

There are many different ways of doing this:

  • value of a moving average
  • trendline
  • fractal or pivot
  • ATR
  • Bollinger bands

But, I’ve only ever found one method that works for well in the short-term (for me).

Which is to trail a stop at consecutively higher lows when long, or consecutively lower highs when short.

  • when long move the stop loss to the new higher low at the close of the session
  • when short move the protective stop loss to the new lower high at the close of the session
  • repeat until stopped out

Trailing Stop Long Strategy

Trailing Stop Short Strategy

I know – basic and crude. But who cares? It works and works well.

 

Final Thoughts

Day-trading is particularly hard on the emotions; losing money so rapidly, and often many times a day is hard to handle emotionally. This leads to revenge trading.

There’s also more random noise on lower timeframes meaning system results are not as accurate.

Also it can be physically demanding being at your screen for large amounts of time.

Trend-following also has its problem for the beginner.

It takes huge amounts of patience both to wait for trends to develop.

You have to sit through large price reactions and are able to do nothing about it.

This is only made worse with margin trading, as leverage skews our emotions.

Seeing profits go up in smoke, and feeling you’ve wasted valuable trading time, can also lead to revenge trading.

Short-term trading is a better fit for neophytes, you hit the cash register sooner, without the problems associated with either day-trading or long-term trading.

 

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John Scott
John Scott has been trading CFDs and FX since 2003. His favourite markets are the Dow 30, Gold and the GBP/USD. John believes short-term price action trading is the best approach for beginners to trade. Tradeneophytes is his humble attempt at helping new traders reduce the learning curve to trading success.
Posted in Technical Analysis.

John Scott has been trading CFDs and FX since 2003. His favourite markets are the Dow 30, Gold and the GBP/USD. John believes short-term price action trading is the best approach for beginners to trade. Tradeneophytes is his humble attempt at helping new traders reduce the learning curve to trading success.

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