-- Yoda
1) Start Watching Moving Averages: A Simple Moving Average [SMA] is the average price of a stock over a specific period of time. The most common time frames are 10, 20, 50, 100, and 200 days. Exponential Moving Averages [EMA] are much the same except they give more weight to recent prices which reduces lag and increases sensitivity to price changes in the right now. Whether SMA or EMA, the overall idea is to show whether a stock is trending up or trending down. Generally, a good long [buy] candidate will have a moving average that is sloping upward. If you’re looking for a good stock to short [not advisable for most traders], you generally want to find one with a moving average that is flattening out or declining.
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| S&P500 Index w/EMAs |
2) Understand Overall Cycles or Patterns: Generally, the markets trade in cycles, which makes it important to watch the calendar at particular times. From 1950 to 2021, most of the gains in the S&P 500 have come in the November to April time frame, while during the May to October period, the averages have been relatively static. Theoretically, as a trader, cycles can be used to your advantage to determine good times to enter into long or short positions. I don’t put a tremendous amount of stock in this idea. I acknowledge it and make sure I view ideas with that context in mind, but I certainly wouldn’t initiate trades based solely [or even primarily] on this idea of cycles.
3) Get a Sense of Market Context: What is Context you say? At a minimum, it’s a topic worthy of its own section or post, but for our purposes here, Context is the setting in which you consider a trade. That setting is made up of a few factors such as the trend of the overall market [Dow Jones Industrial Average or S&P 500] across multiple high timeframes [Yearly, Quarterly and Monthly] as well as the trend and position of the particular stock across those same timeframes along with the Weekly and Daily trends. Context is positive if all of those metrics point higher. This is the time to consider long trades [buys]. If the trend is negative, you should do nothing/close out current long positions. Shorting stocks and etfs is highly specialized and requires specialized knowledge, information and skill, so I don’t recommend it for most individual traders and certainly not newer traders.
4) Controlling Risk: Managing risk is the most important aspect of trading successfully. Like all trading, short-term trading involves risk, so it is essential to focus on minimizing risk relative to return in order to profit from your trading overall. This includes not only using stop loss orders, but also security selection, use of well structured setups, stalking of trades, position sizing and the use of stop loss orders to name a few.
5) Practice Trading: You will hear tons of theories and reasons why paper and/or simulated trading is a waste of time. Usually these arguments are based on the fact that simulated trading by definition involves no risk, thus one’s emotions are able to stay safely on the shelf. As a result, these folks deem paper trading worthless since live trading involves risk by definition and thus is arguably all about managing your associated emotions. I understand the point opponents of paper trading are making… I just think many of them are missing/understating some of the benefits of simulated trading. Practicing with demo accounts can help you get familiar with trading platforms and strategies without risking real money, thus you have a chance to learn the quirks of your platform AND you get a chance to see how your strategy might perform in a similar situation thus allowing you to turn away from a strategy that doesn’t even work in the optimal setting of a simulation without losing a cent. You’ll have a plenty of time to adjust to the emotions of trading when you do start trading live… but at least it won’t be combined with lack of familiarity of your trading platform and how your strategy trades on live data.
6) Keep Emotions in Check: Trading Emotions [or at least a trader’s reaction to said emotions] are arguably the real distinguishing line between successful and unsuccessful traders. Because they can and often do cloud your judgment and lead you to make poor decisions when trading, there’s no more important component of your trading profile than your trading psychology. It’s so important, I call it Emotional Capital and managing your EC will, at the risk of hyperbole, be a major determining factor of your success or failure as a trader.
Note, this list neither is, nor purports to be, exclusive. But by following these tips and mastering basic concepts for successful trading, you can condition yourself to succeed as a short-term trader. In other words, you can make short-term trading the additional revenue stream that you want it to be.
