Make $5000 with Just $500-there Short-Term Trading Strategies
The first thing a trader needs to decide before investing in the Forex market is this: the trading time frame that he or she will focus on. This helps set the tone of the trading plan.
There are roughly three trading time frames: long term, medium term, and short term. Today we will focus on the short-term trading and its strategies.
The so-called short-term is a relative concept. To a swing trader, it could mean weeks. While to a scalper, it could mean just a few minutes. The short-term trading we will discuss about today is intraday trading, which involves the opening and closing of trades within 24 hours.
A short-term trader usually aims for small to moderate gains, but trades frequently over a specified period. Many short term traders feel that they can increase their win rates by frequent trading. Obviously, they are wrong. Even if a strategy has a 60% win rate, then there is still a 40% chance that every trade will be loser，and four or even six consecutive losing trades are quite common. The distribution of wins and losses can take any form, so it is not necessarily true that higher frequency will bring short-term traders more profits.
The most popular short-term trading time frames are 30 minutes, 15 minutes, 5 minutes and 1 minute. The shorter the time frame you work with, the more candles you will see with the daily data. For example, within a day, you will get six 4-hour candles and forty-eight 30-minute candles.
Today we will mainly discuss the three trading strategies for short-term trading.
1. Short Term Support and Resistance Trading
Support and resistance trading is one of the best strategies for short-term Forex trading. The main idea is to identify the important levels and to trade a breakout. The risk management for this strategy is also very easy and straight-forward, simply put a stop loss order above or below the important level.
Short-term traders are supposed to get out of the trades quickly. Yet in real practice, many traders are reluctant to close a trade when they are losing, thus unwittingly holding the trade for days, and even weeks. So as a short-term trader, we must ensure that our trades are with-in the short-term time frame.
Below is a 5-minute chart of the EUR/USD, it suggests a trade taken after a support breakout.
We can see in the chart that the support level has been tested three times with each test being marked by a black arrow. On the last attempt, we see a strong bearish bar, indicating a breakout.
If you decide to take the chance to go short, you may place a stop loss order above the broken support as indicated by the red horizontal line. As for the take profit level, we can use the fixed range suggested by the chart. Notice the two tops above the support level, they are approximately at the same level. Therefore, we can use the distance (as indicated by the blue vertical arrow) between the support and the tops as the profit target.
2. Short Term Trend Trading
This strategy involves riding intraday trends and profiting from them. In addition to this, when an intraday trend gets interrupted, you can consider opening a trade in the direction of the new breakout.
The rules of this strategy are also simple. If you see a currency pair bounce from the same trend line for the third time, then you may assume that a trend is likely emerging.
Trend line trading requires a well-placed stop loss order. Your stop should be located at the starting level of the third bounce, which you use to open the trade. Then as the price moves in the expected direction, you can manually adjust the stop loss order. When the breakout appears, you should close the trade. If the breakout grows into a reversal, then you can trade the new trend.
Above is the 1-minute chart of USD/JPY. On the left side of the chart we can see a bullish trend marked by the yellow line. The black arrows and the green arrow at the lower left mark the three bounces. We can go long at the third bounce, and place a stop loss order right below the swing bottom.
The price shoots up quickly afterwards, making several new highs. You can adjust your stop loss upwards to chase the trend. When the price falls through the trend line (marked by the red circle), we’d better close the trade. The first swing bottom after the breakout is marked by the black horizontal line. If this line is broken, it is quite likely that a strong reversal is emerging, and we may go short here. Please note that the black line was tested before the breakout.
After the breakout you can go short and you should place a stop loss order right in the middle of the distance between the top of the trend and the black line. Then how long could you hold this trade? Let’s look at the the trend size as marked by the long blue vertical line. You could hold the trade for a minimum price move equal to half the size of the previous trend, as marked by the short blue vertical arrow on the right.
3. Short Term Trading with Candle Patterns
Trading with the candle patterns is another popular short-term trading strategy. This strategy involves scalping the market using candle patterns, and the traders will be focusing on the 1-minute, 5-minute and 15-minute charts.
For this strategy, you would be looking for reversal candle patterns on the chart. You should also protect each of your trades with a stop loss order and hold the trade for a minimum price move equal to the size of the candle pattern.
This is the 5-minute chart of EUR/USD, and at the bottom we can see an Inverted Hammer. You could buy the pair when the price action breaks the upper level of the Inverted Hammer and place a stop loss order below the candle.
The blue arrow at the bottom of the chart indicates the size of the Inverted Hammer, which could also be used as the profit target. So the target should be placed at the top of the candle. You would close the trade when the price reaches this level. This is a quick strategy to setup. After all, speed is very important when trading such short term patterns on the 5-minute charts.
Now let’s look at another example:
This is the 5-minute chart of the GBP/USD. The candle pattern here is the bullish Harami, located in the black rectangle on the chart.
You could buy the pair when the price breaks the upper level of the bullish Harami. This is an indication that the previous bearish price action is likely to reverse. You would place a stop loss below the pattern. Similarly, you would wait for a minimum price move equal to the total size of the bullish Harami, and place your take profit level above the pattern. Whenever the price reaches the target, you would exit the trade. On the chart above this bullish Harami lasted for about 40 minutes.
Short term trading typically involves trades that are opened and closed on the same day. Short term traders have a large frequency of trades within a day, but aim for relatively small gains for each trade. Short term traders usually works with 30-minute, 15-minute, 5-minute, and 1-minute charts. Scalp trading is ultra-short term and involves trades that can last just minutes.
The three short term trading strategies discussed in this article are:
1. Short Term Support and Resistance Trading: The key is to trade breakouts and open your trade in the direction of the breakout.
2. Short Term Trend Trading: Catch emerging trends: Use a trend line tool to look for reversals. You can trail the stop as the price moves.
3. Short Term Candle Pattern Trading: Look for reversal candle patterns on 15-minute, 5-minute, and 1-minute charts.
Edited 13 Mar 2020, 18:09
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