Short Term Trading: Is It Right For You? (5 Simple Questions)
Investing has risks and short term trading is at the peak of that risk spectrum. Ask yourself these questions and look at the evidence before making the decision to, what is effectively gamble in a stock market casino.
CHECK OUT: Before picking stocks check out our keep it simple stupid guide for investment virgins.
1. Do you know what short term stock trading is?
Short term stock trading is also known as swing trading and involves buying and selling positions in stocks for quick capital gains.
It comes in four flavors:
- Day trading: buy and sell positions in stock over the course of a single day.
- Short selling: to short a stock and buy shares simultaneously, chasing the profit margin between.
- Margin trading: to take a broker-loan to buy shares, paying interest back on the loan over time.
- Position trading: like a buy-and-hold strategy, just over weeks rather than years.
Day trading is the equivalent of sports betting, only more of a gamble. According to a 2004 report, across a six-month period, 8-out-of-10 day traders lost money.
With short selling and margin trading, you’re taking the risk of day trading and multiplying it.
Out of the four flavors, position trading is the lesser risk but still hugely problematic.
2. Do you understand how stock values work?
You might be a stock market expert, and answer “yes” to the above question. Yet, if you’re not, then there’s one simple fact:
The most popular and successful stock strategies focus on the long game.
This is because stock prices change hour-to-hour, day-to-day, and even week-to-week, based on popular opinion. In comparison, a well-picked stock may have bad spells on the market, but if it is a well-run company the stock value will likely represent a consistent performance over a long-term period.
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3. Have you found a “short term strategy guide that works”?
Put the beer goggles down. You haven’t found a magic wand. There is no short term trading strategy that universally works because if that existed, we wouldn’t be writing this.
For instance, this “magic guide” might give tips in how to master the moving average or understand cycles and patterns. It may even give you news sentiment secrets and a way to mitigate risks with stops.
Here’s the truth. If you hit that stop, you’ve likely made a loss. How many losses can you take? If you’re trying to invest pick your stocks with the long-term in mind. If you’re after a quick-buzz and like sports, do sports betting. It is probably less risky and most importantly, the odds are visible.
Remember, only 8-out-of-10 traders win in short term trading. So before you start, no matter your strategy, you have an 80% chance of losing money.
4. Have you found a tool or app that predicts well in your training trading accounts?
First off, tools and apps can be wonderful things. However, many strategies that lead to specific apps and tools can’t be trusted. They’re often affiliate links. So, use tools and apps for trading, but like any investment, do your due diligence before committing. Always check lots of reviews by trusted sources.
Plus, please remember, if there was a tool or app (or bot) that could predict with true accuracy, everyone would be trading with great success, and that’s not the case.
5. Are you aware of all the costs of short term trading?
Even if you’re in the 20% of winners, unless your took a major risk your rewards will be nominal. For example:
- You will be hit with brokerage costs and depository expenses whether you make a profit or not. So if you did make money, you’re profits will be hit. And the more you trade, the more brokerage expenses you’ll accumulate.
- As you buy and sell frequently, you’ll have to pay Short Term Capital Gains taxes on any profits. This taxation isn’t applicable if you buy and sell 12-months apart.
- If you trade frequently you might become classified as a trader, and that means profit can be taxed as business income (a higher rate).
So even if you win, you’ll be winning less than if you trade over the long-term. Plus, if you aren’t willing to get out of a losing position early, you might suffer massive losses.
CHECK OUT: Five differences between stocks and bonds that will help you make the right investment decision.
BONUS QUESTION: Can you cut your losses?
There’s one question that encapsulates short term trading and that is “can you cut your losses in a trade?”
Be honest when you answer because if you’re unwilling to take losses regularly, short term trading is definitely not for you. That’s even if you believe you can be in the 20-percent of winners.
Be smart, and always invest wisely.