Short Term Investing Strategies and Tips

While the best gains come from long-term investing, certain strategies allow earning strong returns on short term investments. By effectively using leverage, derivatives, momentum trading, and arbitrage along with proper capital protection tactics, investors can produce outsized returns in months or a few years versus decades. This guide outlines the best short term strategies, vehicles to use, and risk management approaches.

Benefits of Short Term Investing

Short term investing aims to generate substantial gains in under 5 years by:

Exploiting short-lived market opportunities and inefficiencies
Using leverage to amplify returns during upside moves
Profiting from short-term price momentum and trend shifts
Earning outsized yields through options strategies
Focusing entirely on absolute returns versus benchmarks
Avoiding long down cycles damaging multi-year returns
Enabling pursuing new strategies as conditions change

Short term investing works best for opportunistic investors with high risk tolerance. Those with long horizons are better served buying and holding.

Types of Short Term Investment Vehicles

Effective short term investing vehicles include:

Stocks – Aggressive trading strategies allow outsized gains from surging momentum stocks.

Options – Powerful leverage from calls, puts, and advanced option spreads.

Futures – Profit from short-term commodity and index moves with added leverage.

Forex – Trade currency fluctuations driven by interest rate and economic policy moves.

Certificates of Deposit – Lock in fixed above-average interest rates for 1-5 year terms.

Floating Rate Bonds – Earn sizable yield premiums over duration-matched Treasuries.

ETFs – Gain diversified short term exposure to markets and sectors.

Crowdfunding – Pool capital in startups and real estate for quick returns.

Assess risk-reward scenarios to select optimal short term vehicles. Combine several for diversification.

Key Short Term Investing Strategies

Utilize these strategies to earn outsized near term returns:

Momentum Trading

Buy securities exhibiting strong price appreciation and positive news flow. Sell quickly at signs of peaking.

Dip Buying

Take long positions when an asset temporarily corrects during an overall uptrend. Quickly exit during downward trajectory shifts.

Arbitrage

Simultaneously buy and sell identical assets across different exchanges to profit on pricing inefficiencies.

Derivative Strategies

Use options and futures contracts to speculate and hedge on upside and downside movements.

Algorithmic Trading

Automated computer models identify and trade patterns faster than human traders can detect.

News-Based Trading

Capitalize on sharp price movements following major announcements like earnings or economic data.

Crowdfunding

Provide seed capital to startups and real estate investors for early liquidity events and high potential gains.

Leverage technology and liquidity across markets when employing these strategies. Remain nimble.

How to Manage Risk

Mitigate risks using these precautionary tactics:

Hedge long positions with options collars, inverse ETFs, and stop loss orders.
Only trade highly liquid securities to ensure fast exits. Avoid exotic products.
Maintain overall portfolio diversification so no single position jeopardizes you.
Limit position size proportional to account size and risk profile.
Set automatic price alerts so you act before sustaining large losses.
Keep sufficient cash to avoid margin calls in down markets.
Buy wide investment grade credit spreads when investing in bonds short term.
Trade small positions first to develop experience before increasing size.
Avoid overnight holding of speculative assets vulnerable to gaps down on news.

Managing risk separates successful short term investors from gamblers. Play defense.

Tips for Short Term Stock Trading

Trade stocks profitably on shorter timeframes using these tactics:

Closely monitor daily volume and price action using technical analysis.
Use momentum indicators like the RSI, moving averages, and MACD to confirm uptrends.
Focus on quality companies likely to outperform if markets rise. Avoid penny stocks.
Learn to read basic candlestick, triangle, wedge, channel, and flag chart patterns signaling continuations or reversals.
Take profits quickly once momentum stalls. Don’t try calling market tops.
Cut losses early if upside targets aren’t quickly reached. Never average down in losing trades.
Trade options for leverage and risk management versus buying stocks outright.
Stick to day trading in an IRA account to maximize tax benefits of short term trading.

With practice, skilled stock traders can earn reliable income from short term plays.

Effective Short Term Option Strategies

Options offer leverage, directionality, and risk parameters ideal for short term gains:

Buy Calls and Puts – Profit from continued upside or downside without owning the stock.

Spreads – Define and limit risk-reward through using spreads like bull call spreads, put credit spreads, and ratio spreads.

Iron Condor – Profit from sideways markets staying rangebound through short straddles.

Calendar Spreads – Take advantage of time value decay by selling sooner dated options against longer dated ones.

Covered Calls – Earn income on existing stock holdings by selling calls against them.

Protective Puts – Hedge existing long positions by simultaneously buying puts as insurance.

Learn how volatility, time value decay, and strike selection impact returns. Trade liquid options with tight spreads.

Key Considerations for Short Term Investing

Keep these essential tips in mind:

Remain flexible, willing to alter strategies quickly as market conditions change.
Be skeptical of tips or external recommendations. Do your own research.
Avoid greed. Don’t chase impossibly high returns or overtrade.
Establish positions in advance to profit from predictable events like earnings.
Use stop-losses to limit losses. It’s better to take small losses early than sustain big ones hoping for reversals.
Leverage technology to gain trading advantages like algorithms, analytics, platforms.
Consider specializing in specific asset classes or sectors where you develop expertise.
Maintain tax awareness through strategies like tax-loss harvesting and keeping short term trades in IRAs.

Outsmarting markets is extremely difficult. Stay humble and keep learning.

Avoiding Pitfalls of Short Term Trading

Steer clear of these common mistakes:

Failure to hedge risks through diversification or option strategies
Letting losses grow too large before cutting them
Chasing momentum too late after large up moves
Getting shaken out of good trades due to normal volatility
Assuming this time it’s different and a correction can’t happen
Lack of investment plan, trading emotionally instead of strategically
Overleveraging and taking excessive risk for potential returns
Trading illiquid securities unable to be exited quickly
Going all in on speculative trades hoping for home run returns
Failing to pay taxes on short term capital gains when realized

Losses are inevitable. Control risk so they don’t destroy your capital.

Key Differences From Long Term Investing

Short term investing contrasts with buy-and-hold strategies across:

Holding periods – Months vs years or decades

Return objectives – Seeking high absolute returns through tactics vs benchmark outperformance

Risk tolerance – Aggressive vs moderate risk appetite

Asset types – Speculative securities and derivatives vs quality stocks and bonds

Loss acceptance – Cutting losing trades quickly vs riding out volatility

Position sizing – Larger position sizes possible with closer monitoring

Performance metrics – Sharpe and Sortino ratios judge risk-adjusted returns

Tax implications – Short term capital gains rates apply so placement matters

Temperament – Thrive on action vs patience and resilience

Determine which approach best suits your personality and financial objectives.

The Risks of Short Term Trading

Major risks include:

Large sudden losses from unhedged trades
Getting trapped in illiquid positions during selloffs
Increased transaction costs eroding gains
Letting gains evaporate by holding too long

-temporal successes breeding overconfidence, leading to blown accounts

Tax drag short term capital gains realization every year
Addiction to adrenaline overshadowing prudent risk management
Allowing personality flaws like greed and fear direct trading

Losses are inevitable. Manage risk through diversification, hedging, discipline, technology, and learning from mistakes.

Combining Short Term and Long Term Investing

Blend both short and long term strategies by:

Making shorter term trades with a portion of your overall portfolio value
Investing in long term vehicles like stocks, bonds, and real estate for stability
Swing trading momentum stocks but holding core positions long term
Maintaining core buy and hold index fund holdings paired with tactical sector ETFs
Tilting allocation more short term during periods of volatility and unpredictability
Generating short term income to fund long term savings and compounding

Strategically integrating both methodologies benefits from their respective advantages.

Conclusion

While short term investing is higher risk, skilled traders can produce market-beating returns through effective leverage, derivatives strategies, arbitrage, and actively trading catalyst events. Mitigate risks by managing position sizing, diversifying across asset classes, hedging, maintaining stop losses, and developing expertise in fundamental and technical analysis. Compared to passive long term strategies, short term trading requires constant research, monitoring, and willingness to rapidly change directions. Blend both core long term holdings with tactical short term trades to optimize results. With dedication and prudent risk management, short term investing offers motivated investors pathways to earn attractive returns.

Key Takeaways

Use momentum, arbitrage, derivatives strategies, and catalyst opportunities to generate outsized short term gains.
Balance aggression by managing position size, diversification, risk-reward ratios, and maintaining stop losses.
Trade high liquidity stocks, options, futures, bonds and currencies amenable to speedy entry and exit.
Combine hedged speculation and multi-asset trading around a core long-term portfolio for stability.
Maintain risk and tax awareness – short term trading generates higher transaction costs and capital gains taxes.
Avoid emotional decision-making, chasing unsustainable returns, and excessive risk taking. Stay nimble.

FAQs

What is considered short term investing?

Short term investing involves generating returns through strategies and holding assets for under 1-5 years, rather than decades like conventional long term buy-and-hold approaches.

What trading strategies work best for short term investors?

Effective short term strategies include momentum, swing trading, technical analysis, arbitrage, options spreads, and catalyst-driven events like earnings announcements. Agility is key.

What financial instruments are best suited for short term trading?

High liquidity assets like large cap stocks, forex, commodities, and index ETFs allow easy entrance and exit. Options and futures offer leverage. Bonds earn carry income.

What risks are associated with short term trading?

Frequent trading incurs higher transaction costs, taxes, and volatility risks. Short horizons increase potential for sudden losses if not managed. Long streaks of losses can deplete capital.

How can short term investors manage risks?

Using tight stop losses, position size limits, and hedging strategies preserves capital. Diversification across multiple assets lowers portfolio volatility. Maintaining enough cash minimizes margin calls.

How does short term trading differ from passive long term investing?

Short term traders seek high absolute returns using leverage and derivatives, while long term investors focus on benchmark outperformance over decades using buy-and-hold.

With prudent risk management, opportunistic short term trading strategies can complement long term holdings to boost overall returns.