• Short-term trading involves making quick trades that last from seconds to days, focusing on price movements rather than long-term fundamentals.

• This approach aims to capitalise on market fluctuations and often uses instruments like derivatives and options to benefit from both rising and falling markets.
  

• Popular strategies like momentum, range, breakout, and reversal trading help traders spot market trends and make informed entry and exit decisions.
  

• Emotional trading, ignoring market trends, and choosing the wrong time frame are common pitfalls in short-term trading.

In short-term trading, traders take positions that sometimes last a few seconds to several days. It is focused on price actions rather than the fundamentals of any given asset. Short-term trading is used as an option over the more traditional strategy of buying and holding, which could be for a month, a quarter, or even years.

In this style of trading, the trader aims to capitalise and profit from the quick movements in the market. Hence, they are always on the lookout for any sudden market fluctuations, major political events, or the release of any economic survey or data that leads to rapid movements in the market. This type of trading is also known as active trading, as it is the complete opposite of investing in passive funds. As a result, it does not involve purchasing and selling the underlying assets.
 

Traders who use the short-term strategy often favour instruments like derivatives, spread bets, and options as they allow them to enter and exit the market without needing to own the asset. They can also benefit from the ups and downs of the market and book profits.

Short-term trading, which is also called active trading, offers numerous advantages:
 

1. Opportunity for quick gains: Since the positions are held for a relatively shorter period, short-term trading allows you to make bigger gains in a short time frame.

2. Greater control over finances: Since these trades do not have any lock-in period or any other time-bound restrictions, you can enter and exit the market as per your preferences, giving you more control over your finances and reduced risk.

3. Reduced exposure to overnight risks: The financial instruments used in short-term trading are not subject to any overnight risks, including unexpected market downturns and other overnight charges and fees.

4. Reinvesting capital through multiple trades: Short-term trading lets you make multiple trades in a day, allowing you to reinvest your money more frequently.
 

Also read: What are shares

Here are some popular short-term trading strategies that help traders identify winning opportunities and determine the entry or exit points:
 

1. Momentum trading

Momentum trading involves following the trend of a stock's price movement. If the price of an instrument is falling, it is likely to keep falling as more traders join the trend. Similarly, if a price rises, it may continue to rise as others join in again.
 

Good short-term traders can spot these trends early by using moving averages to identify potential price movements. When the averages slope upwards, it is indicative of a price increase. Short-term trading aims to capitalise on these trends rather than waiting for the exact highs or lows.
 

2. Range trading

Range trading focuses on buying and selling within a specific price range between support (the lower boundary) and resistance (the upper boundary). In this strategy, prices typically fluctuate within this range of upper and lower boundaries unless a strong event pushes them to go beyond.
 

Short-term traders will buy at the support level and sell at the resistance level, profiting from the small price changes. In order to execute these trades, traders use metrics like the relative strength index (RSI) and stochastic oscillator to predict when prices might go out of the range.
 

3. Breakout trading

Breakout trading aims to predict when the price of the stock will break out of its established range, creating a new trend. In this case, traders monitor market sentiment and volume-weighted moving averages to identify these breakout points early on.
 

They use limit orders to ensure they do not miss the opportunity to buy or sell during these breakouts, even if they are not actively watching the market.
 

4. Reversal trading

Reversal trading is about spotting when a market trend is about to reverse. Traders look for signals that a price has peaked (also known as a bearish reversal) or bottomed out (also known as a bullish reversal).
 

For example, in a bullish reversal, the price is expected to rise after reaching a low point, while in a bearish reversal, the price is likely to drop after reaching a high. Reversal traders anticipate these changes and make trades before the trend shifts to maximise profits.
 

Also read: How to open a trading account online in India

Here are a few common pitfalls that traders need to avoid to execute successful trades:
 

1. Emotional trading: Stock price movements are not as unpredictable as they are made out to be. They are cyclical in nature and follow specific patterns. For example, in some months, there will be more bullish buying and more volatility in the market. It is essential not to panic, get frustrated, or buy and sell irrationally in such situations.

2. Do not ignore market trends: Always be vigilant about average stock prices in a given timeframe. Closely studying these movements will help you understand and spot a trend before it gains momentum, and you will eventually be able to forecast such trends. Remember to stick to a conservative approach when the trends in the market are negative.

3. Trading during the wrong time frame: It is easy to get overwhelmed by the fast nature of day trading, while the slower pace of swing trades where positions are held for a week or more can be underwhelming. In either case, finding the style and strategy that suits you best and compliments your natural skills and instincts to get the best results is important.

• Decide your trading style: Determine the type of short-term trader you want to be, such as a day trader or swing trader. This will help guide your approach and strategy in the short-term trading market.
  

• Research available markets: Look into the different markets you can trade in India, such as equities, forex, commodities, or derivatives. By understanding these markets, you can make informed decisions.
  

• Develop a strategy: Choose a short-term trading strategy that suits your goals and risk tolerance. Whether it is momentum trading or range trading, make sure it is a strategy you understand and can execute well.
  

• Practice with a demo account: Before diving into live trading, practise your chosen strategy using a demo account, like those offered by many Indian brokers. This will help you refine your approach without risking real money.
  

• Open a live trading account: Once you are confident in your strategy, open a trading account with a reputable Indian broker like Bajaj Broking to start trading in live markets. Ensure you fund your account adequately to meet margin requirements and manage risks.

Also read: Difference between Demat and trading account

Brokerage charges

These are fees charged by your broker for executing your trades. They vary significantly across brokers and can be flat fees or a percentage of the transaction value. Many brokers offer discounted or flat fee plans for active traders.
 

Securities Transaction Tax (STT)

STT is the tax levied by the Indian government on the sale of securities. The rate varies based on the security type (equity, derivatives, etc.).
 

Exchange transaction charges

These are the fees charged by the stock exchanges (NSE, BSE) for trading on their platforms. They are usually a small percentage of the transaction value, ranging from 0.00325% to 0.00275%.
 

Other charges may include stamp duty, clearing corporation charges, and DP charges paid for the Demat account maintenance.
 

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