SHORT-TERM AND AGGRESSIVE
TRADING STRATEGIES

Explore short-term and aggressive trading strategies, and develop an understanding of the key principles and risks involved. Most short-term traders are naturally drawn to markets that have higher levels of price volatility, so it is important to learn how to navigate this environment.

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Contrary to long-term investing strategies such as buy and hold, there are strategies that exist to capture short-term price movements. These have unique quirks and magnified risks, so it’s worth establishing what exactly they are, before you set out to use short-term trading strategies such as day trading, scalping and swing trading. 

Fundamentals of short-term trading

Short-term trading can be carried out in any market and any asset class, but most short-term traders are naturally drawn to markets that have higher levels of price volatility. This typically leads to them targeting markets in growth stocks, indices, commodities, currencies and cryptoassets, rather than bonds, blue-chip stocks and other assets where price moves are less dramatic.

When you trade can be as important as what you trade. Markets typically experience increased levels of price volatility when news breaks, during earnings seasons, and during the half-hour periods either side of market opening hours. 

Trade volumes typically pick up at these times as institutional investors such as pension funds rebalance their portfolios. As institutional investors tend to trade in significant size, this can drive up overall trading volumes.

Trading charges and commissions play a significant role in short-term profit and loss (P&L) analysis. The style of trading involves moving in and out of positions frequently, so additional attention needs to be given to bid-offer spreads, financing fees and trade commissions.

Bear in mind that profits on short-term trades are likely to be considered “speculative,” rather than an “investment,” by your tax authority, and thus, liable for higher rates of capital gains tax (CGT).

Understanding aggressive trading tactics

Various factors and techniques that are applicable to short-term trading strategies don’t apply as much to investing for the long term. For instance, short-term traders will give a greater weighting to technical analysis than fundamental analysis.

Technical analysis uses price data to come up with metrics and trading signals that identify short-term pricing anomalies.

The use of short selling also allows more aggressive traders to target moments when a market is perceived to be overvalued. Short-term traders hope to profit from falling markets, rather than waiting for an asset to experience a price dip and buying it when it is undervalued.

Key strategies in short-term trading

There are three main trading strategies applied by short-term traders: day trading, swing trading and scalping. Some degree of crossover exists between these three approaches, but the main differential is the period of time for which positions might be held. 

Day traders, for example, open and close positions throughout a single trading session, but never hold positions overnight. Swing trading strategies are more relaxed in terms of investment time horizons and can involve holding positions for days. Those following scalping strategies may move in and out of positions in an instant.

Some platforms allow traders to set up algorithmic programs, which buy and sell without human intervention. As a general rule of thumb, the greater the frequency of trade execution, the more likely it is that the process will be automated.

Technical analysis for quick decisions

Technical analysis indicators such as the Relative Strength Index (RSI) are tools that offer an instant breakdown of a market. Using them can give you a feel for a market and enable you to identify trading opportunities. 

While indicators can help you to make quick decisions, there are some potential flaws to the approach. It’s possible to find two separate indicators that give conflicting signals, one saying “buy,” and the other “sell.” This highlights the importance of learning what a particular indicator could be revealing, and how reliable it is. 

For example, when the price of an asset diverges from a long-term moving average, it could suggest two different things. Price may soon revert to the norm, or a breakout could be about to occur. One event would require a sale trade to be booked, and the other a buy.

Typically, the greater the number of different technical indicators that point to a particular price move, the stronger the overall signal.

Leveraging market volatility

Another important tool used by short-term traders is leverage. This allows broker clients to increase their overall exposure on a trade by using some of their capital as margin and effectively borrowing from their broker to scale up on risk-return.

Using leverage is a high-risk approach. It magnifies the size of your potential losses as well as the size of your potential gains. If the losses exceed the amount of capital you put up as margin, then the broker will close out the position and crystallise your losses.

Setting realistic goals and limits

Many investors set out to become active traders, but fail because they don’t have enough time to devote to the process, because they make rash or emotion-led decisions, or because they started out with unrealistic aims. It is essential to stick to the plan of making realistic gains.

If you’re looking to generate a large return from a small amount of capital, then you’ll have to scale up on risk-return, and that route is full of extreme challenges. In the long term, you can’t beat the market.

Starting off trading by using a risk-free demo account can help you to test your strategies and develop a format in which as much emotion as possible is taken out of the trading process.

Risk vs reward analysis

One safety measure that allows short-term traders to instil discipline into their trading is the risk-reward ratio. This converts the possible gain or loss of a trade into an easy-to-use number by dividing the amount of the potential gain by the size of any potential loss. 

Those using stop-loss and take-profit orders can set up each trading position to comply with the risk-reward ratio and therefore, minimise the risk of one trade doing considerable damage to overall P&L.

Not every trade will be a winning one, and the risk-reward ratio can be used to establish if your strategy might make an overall profit even with losing trades factored in.

Some risks associated with short-term trading are generic and apply to other forms of investing, but some are specific to strategies that focus on aggressive, fast-paced trading. Short-term traders can avoid overtrading and deviating from their strategy by structuring breaks into their trading day.

There are techniques that can be used to mitigate some of the risks, but an underlying factor that increases general risk levels is that high-frequency and short-term trading can result in emotions taking control.

Some traders rely on an edge as an attempt to use statistics and metrics to keep a competitive advantage in their trades.

Risks	Risk management techniques
Overtrading: Treating trading like a “job” can mean that you take a more professional approach, but can also lead to you feeling a need to trade. Forcing trades in market conditions that don’t suit a strategy is a fast-track way to recording losses.	Stop-loss/take-profit orders: These automated instructions to buy and sell a position at a certain price level can be set up at the time you enter into a trade or adjusted as a trade progresses. They instil discipline into a strategy and protect against the risk of news events causing extreme price moves.
Selling short: If you buy an asset and its price falls to zero, you lose all of your capital, but if you sell short, the size of the losses on the trade can exceed the size of the initial investment. While the price can’t move below zero, it can rise infinitely.	Adjust your leverage: If you do want to use leverage, choose a broker that allows you to adjust the leverage rate on a trade-by-trade basis. This allows greater control over your total exposure levels.
News events: Short-term trading using technical analysis relies to an extent on the market in the near term behaving in a similar way to how it has done recently. News events relating to the broader geopolitical environment, or a specific market, can change the markets in an instant and nullify the effectiveness of technical analysis.	Operational risk: If you are allocating capital to short-term strategies, you must be certain that you can follow events and trade in and out of positions. Your personal IT infrastructure, and that of your broker, need to be reliable.

There are a lot of additional risks associated with short-term trading, but there are also risk management techniques and strategies that can be used to help mitigate them.

Final thoughts

All investing includes an element of risk, but short-term trading is positioned at the riskier end of the investing spectrum. Given the temptation of being able to make returns in a short time frame, the approach remains attractive to some investors. 

Those who develop a thorough understanding of what is involved, and adopt a disciplined approach, put themselves in the best position to make a success of the approach.

Visit the eToro Academy to learn more about short-term and aggressive trading strategies.

Quiz

FAQs

What distinguishes short-term trading from long-term investment strategies?

The main difference between short-term trading and buy-and-hold investment strategies is the investment time horizon of the positions traded. They also differ in terms of the types of analysis, trade management and trading tools that are used.

How can traders effectively manage risks in aggressive trading scenarios?

Making a success of an aggressive trading strategy involves developing an appropriate mindset and understanding how to effectively use the trading tools at your disposal. The trading platforms of different brokers are set up in different ways, so there can be value gained by ensuring that the one you use matches your trading style.

What tools and indicators are most useful for short-term trading?

Short-term trading relies heavily on technical analysis indicators. These process market data such as price and trade volumes to allow traders to get a “feel” for the market. They can be set to different time frames and so can be used to identify opportunities that appear on a time scale ranging from seconds to minutes and hours. It’s also important to use an Economic Calendar to plan for times when news announcements might trigger an increase in price volatility.