Short-term trading is considered a riskier alternative to the more traditional investing. It is normally performed on derivatives or CFD instruments, that allow for buying and selling a position depending on the direction of the price that a trader thinks it might go.
When trading short timeframes, it is not enough to simply analyze economic news. Sometimes there is very little time to catch the moment and if you are late even a little bit, you won’t be able to take advantage of the news. So, how to analyse the charts if you are focusing on short-term trading? These are 3 ways to enhance your technique.
1. Analyse different chart timeframes
When analysing the market, you may expand your attention to different chart timeframes. Sometimes an opportunity may be less obvious on a smaller chart timeframe and more obvious if you zoom out and look at the bigger picture, and vice versa. Evaluating an asset on different timeframes might also help confirm a trend and make a better informed decision.
As an example, let’s look at the Tesla stock and evaluate it’s chart on three different timeframes: 30 minutes, 2 and 4 hours. If we take a look at the short-term conditions and analyse them with a simple combination of the RSI and SMA indicators, we may see that both indicators suggest that Tesla is in a strong upward trend. The RSI is showing that Tesla is about to hit the oversold level, which might be a signal for a trend reversal, however not yet.
3 Steps for Better Short-Term Analysis
Zooming out, a look at the 2-hour timeframe shows us that the upward trend is emerging and is likely to prevail on a more long-term basis.
3 Steps for Better Short-Term Analysis
In order to confirm this, a trader may take a look at the 4-hour candlestick chart. The RSI suggests a reversal, while a crossover of the SMA hasn’t happened yet.
3 Steps for Better Short-Term Analysis
Based on this analysis, a trader may seek an opportunity of a “Buy” position and continue with the trend until a bearish reversal follows on the 4-hour chart.
An analysis of different chart frames might allow a trader to decide on the support and resistance length of the deal, its direction and generally may give a trader more information about the price formation. One may consider opening several tabs with the same asset and switching between them when necessary, in order to quickly analyse the asset on different timeframes.
2. Search for chart patterns
Chart patterns may be considered as one of the keys to successful technical analysis. Chart patterns appear and indicate important market phases, which a trader should be on a lookout for: upward and downward movement and sideways trend.
There are two types of candlestick patterns that every trader should consider learning: reversal and continuation patterns. While it might be wise to double check the signals received from the patterns, they might be convenient indications of what’s to potentially expect from the market.
3. Adjust your indicators
While most indicators work well with the standard settings, learning how to adjust the indicator to your needs — the specific timeframe and market conditions you trade, might allow you to enhance your strategy. But how to know which settings to use?
Smaller settings normally lead to higher sensitivity of the indicator, while larger settings make the indicator less sensitive and, therefore, the signals may be considered more accurate (however, it still doesn’t mean that they are 100% correct). An example of that is the RSI indicator, which may be used with the standard settings of overbought at 70 and oversold at 30, but may also be adjusted to the levels of 80/20 for a more informed approach. At the same time, indicators with larger settings might be lagging.
It is all about finding the balance and adjusting the indicator in a way that corresponds with your trading approach.
4. Extra step: quick decision making
In short-term trading, there is not much time for making a decision. Sometimes everything has to be decided within minutes, and thinking too long might be detrimental. With that said, it doesn’t mean that you should jump on every opportunity that you think is out there. It’s important to be able to analyze the risks quickly as well, so preparing your trading plan in advance and refraining from hasty decisions are crucial components of a better short-term trading technique.
Conclusion
Trading short timeframes is a lot different from the more traditional investing route, so it involves different methods. To possibly improve your analysis of the markets when trading short-term, you may try assessing different chart timeframes, searching for candlestick patterns and adjusting the settings of your indicators. Another important part of short-term trading is making quick decisions — a skill that has to be mastered by any trader who wishes to make short-term trading their main focus.
