Before I start let me brief you difference between short-term and long-term trading with the help of the below image.
The stock market is all about choosing the right stocks and choosing it on a short-term basis can definitely sound risky. However, we must remember that risk should not be a factor to stop us from trading, it's all about good and thorough research that can bring us back to the game while choosing the best stocks on a short-term basis.
Sometimes the pressure of choosing the best stocks on a short-term basis can be very intimidating, one might prefer to go with high beta stocks which are basically the stocks that have very high fluctuations in their prices. Low beta stocks are not very preferable by traders because it is less volatile and not a great choice for the traders who prefer to get good yields in a short span of time.
A healthy trader is one who has a clear strategy in mind and always stand by it. Greed is something that gets traders out of the game. So, it is important to not let greed take over the emotions while trading in stock market. It is important to keep in mind that we choose liquid stocks for short-term trading because of its benefits like how they can be traded easily and quickly.
It is usually advisable to traders to take trading positions in the direction of the market. It is important to understand the directions of the market so for example if your trading positions go against the market trend and you suffer a loss, then it will be very difficult for the stocks to recover in a small time period.
Steps for successful short-term stocks trading:
So how do you exactly choose stocks if you are short term trader? It is important that you do your homework first that is performing a basic analysis of a shortlist of companies to decide if you are going to buy or short-sell them. So if want to have a short snapshot of a company without going through the complications of an in-depth examination of its balance sheet or mathematical analysis, it is better that you do the basic analysis of the company. It basically helps you to gain basic knowledge of a number of companies which in return will help you in situations like when important announcements are made you can capitalize on any potential movement in their share price.
Step 1: Read the news
In order to choose the right stocks you will first have to choose the right companies and you can do that by picking a handful number of companies and starting to analyze them. Then after you have picked your companies the next to-do thing will be to find the news through the financial press regarding the current status of companies. So the basic parameters that you would be looking for are the general performance of the companies and their share price over the last three to six months, their new projects, any possibilities that one company is a target for a merger or acquisition (M&A) and most importantly that can change the status of the companies in terms of its stocks are the upcoming announcements, so you better have your eyes on these because it can definitely be a game changer.
Step 2: Consider different scenarios
So now that you have information on your selected companies, you can now start creating imaginary scenarios that you would be able to use as trading opportunities. It basically means to mentally prepare yourself from trading situations and outcomes that might arise and how you can prepare yourself in advance for a possible future event that would raise or lower a company's share price. A company’s share price can definitely be a deal breaker so you must prepare yourselves for the recent and likely events that you have gained from your research of the company and try to work out what might happen to its share price under a range of different outcomes. Any outcome that confirms what you already know is probably already factored into the price of the company's shares.
Step 3: Weigh up the odds
So once you have worked out your potential scenarios you can categorize them by likelihood:
Highly likely – the market has priced in the product being as impressive as markets already expect. This is already priced into the share with the 25% recent increase.
Possible –a new product launch can happen, in this situation, the outcome has not been fully priced in.
Unlikely –the product doesn't turn out to be as expected. Although this outcome is not priced in, some traders may be holding positions in expectation of this.
Very unlikely – the product is canceled. The market is not expecting this at all so it has not been priced into the share at all.
Now this will help you to determine whether and how much the company's share price might go up or down if any of these outcomes materialized. This will mentally prepare you for the situation to help you decide to whether to go for long or short of the shares for the news that might actually happen.
Step 4: Technical Analysis
If any of the aforementioned possibilities come to pass, immediately check your price charts to determine the best times to enter and exit your selected long or short trade using technical analysis.
So basic analysis is what you need to perform of the complied shortlist of companies to choose stocks if you are a short-term trader. Then get a snapshot of the companies and make sure that you are all updated on any new that the companies that you have selected is going to make and you are all ready to quickly react to it. Most importantly, be aware of the news of the companies, their share price performance, any planned products or projects, M&A speculation, and analyst recommendations. Then mentally be prepared for the imaginary scenarios for example whether a product launch is brought forward/delayed/canceled or is less or more impressive than expected. Then you are mentally equipped with a buy/sell view and can use technical analysis to determine entry and exit points for your trade if any of those scenarios really occur.