A short-term trading strategy can allow investors to take advantage of price movements over days or weeks. In this article, we will discuss a simple four-step process for implementing a short-term trading strategy. By following these steps, you can potentially earn consistent profits by taking advantage of short-term price fluctuations.
To learn more about CFDs, you can read more here.
Why do CFD traders use short-term trading strategies?
CFD traders use short-term trading strategies for a variety of reasons:
- Short-term strategies can allow traders to take advantage of price movements that may not be apparent in longer timeframes.
- Short-term trading can help traders avoid the ‘noise’ often on longer timeframe charts.
- Short-term trading can give investors more control over their positions.
Choose a currency pair to trade
The first step in implementing a short-term trading strategy is to select a currency pair. When choosing a currency pair, it is essential to consider factors such as volatility, liquidity, and correlation.
Volatility refers to the size of price movements over time. A currency pair with high volatility will experience more significant price swings than a currency pair with low volatility.
Liquidity refers to the ease with which a currency can be bought or sold without affecting the market price. A liquid currency pair can be traded in large volumes without impacting the market price.
Correlation refers to the relationship between two currency pairs. Two currency pairs that move in the same direction have a positive correlation. In comparison, two currency pairs that move in opposite directions are said to have a negative correlation.
Once you have selected a currency pair, you must identify the trend. The best way to do this is by using a moving average.
A moving average is simply a line representing a currency pair’s average price over a specified period. By looking at the direction of the moving average, you can determine whether the overall trend is positive or negative. If the moving average is pointing upwards, the trend is said to be bullish, while if the moving average is pointing downwards, the trend is said to be bearish.
Enter a trade
Once you have identified the trend, you can enter a trade.
If you believe that the trend will continue, you can place a long trade. It means that you will buy the currency pair if it is currently trading below the moving average and sell it if it is currently trading above the moving average.
If you believe that the trend will reverse, you can place a short trade. It means that you will sell the currency pair if it is currently trading below the moving average and buy it if it is currently trading above the moving average.
Stop loss and take profit
Once you have placed a trade, you must set a stop loss and take profit. A stop loss is an order that automatically closes your position if the market price moves against you by a certain amount. A take profit is an order that automatically closes your position if the market price moves in your favour by a certain amount. You can limit your losses and lock in profits by setting these orders.
Exit the trade
The final step in implementing a short-term trading strategy is to exit the trade. There are two ways to do this. The first way is to let your stop loss or take profit orders trigger. The second way is to close your position at a specific price manually. If you believe the trend is still intact, you can move your stop loss to breakeven. It means that you will only lose money if the market price moves against you by an amount equal to the size of your initial stop loss.
By following these four steps, you can implement a short-term trading strategy that can potentially earn you consistent profits. However, it is essential to remember that no trading strategy is perfect, and risk is always involved. Therefore, it is essential always to use proper money management techniques and only risk what you are comfortable with losing.