Lesson 8 – Types of Trading – Short-Term

Regardless of your trading style, “knowing how to trade” is the pre-requisite to trading in the futures market. Without actual trading, all forecasts, computations and analyses are meaningless. Therefore, making a trading transaction is a fundamental skill in any type of futures trading. Short-term trading is the best way for you to hone your trading skills. Even if you eventually adopt another trading style, it will still be beneficial to you.

Unlike other types of trading that rely on analyses and forecasts, short-term trading focuses mainly on your ability to trade. For a short-term trader, accurate judgment of market trend as well as amplitude of currency movements is not that crucial; rather, the ability to carry out a trading transaction efficiently is more important.

Regardless of your trading style, you must know the type of strategy to adopt in any given situation, the right speed and frequency of trading, the most favorable position and timing to buy and sell, the right time to enter the market, the right time to exit, how to limit losses, safeguard and maximize profits effectively, how to place orders to secure the best advantage as well as how to quickly recover yourself physically and psychologically when hit by losses.

Compared to other trading styles, short-term trading is the closest to market reality. It is an ability to react in real-time and does not require any other complementary or supplementary skills. Short-term trading is based on immediate situations of the market. There is no analysis to set trading zones and key trading positions, and waiting for the market to attain them before you start to trade. You do not wait for the market in short-term trading and there are trading opportunities any time.

Undeniably, short-term traders do sometimes define trading zones and positions and adjust their trades based on market observations. However, these settings are all secondary and can be modified or abandoned any time.

In terms of skill requirements, short-term trading requires the least amount of skill and is the simplest. You do not need to equip yourself with tons of knowledge (you do not even need to know or care about what you are trading) or rely on those traders who conduct trades based on forecasts. There is also no need for you to be equipped with the impossibly high skills of information gathering, analyses and consolidation (unfortunately these people always over-estimate their own capabilities, and willfully or unwittingly believe that they know so much more than others). In addition, you do not have to acquire in-depth knowledge of the products and possess insider information required of professional traders.

Short-term traders conduct trading based on immediate market situation.

They grasp the present moment and respond to current actions, rather than digest the overwhelming amount of information or try to predict how other people feel. All they do is to identify market reality, ride along closely and resonate with it. Recognizing market reality and trading accordingly are critical skills. Unfortunately, most traders (perhaps all traders) tend to trade with their own set of ideas rather than in line with the actual market situation. It may seem that they are watching the market, but in their minds they have already created another market of their own. They hope (and they are really just being hopeful) that the real market will move the same way as the market in their heads. We all know that this is impossible! However, many traders have this kind of wishful thinking and what follows is the same failure pattern that befalls these traders each day.

There is only one real type of trading – trading according to actual market situation. This is the essence of short-term trading.

Without the fundamental skill (also the most important skill) of recognizing real market situation, all the other skills are like building sand castles. Devoid of a strong foundation, everything will topple sooner or later. Traders who possess this skill normally do not require any other skills. However, there are exceptions. For example, traders with huge capital or large trading firms will need to go beyond such skill. They must build upon it to develop more techniques and comprehensive skills to play a trading game that is different from that of independent traders.

Their success is more likely attributed to other reasons rather than their powerful trading skills.

However, there are exceptions. There are people who succeed without this fundamental skill. Warren Buffett is a very good example. Buffett is not really a trader, but an expert in value judgment. He predetermines value deviations and enter the market in advance. This allows him to profit from contrarian trades before the mood of the market swings in the opposite direction. Most of us should not aspire to become an expert analyst like Warren Buffett. This would require an in-depth understanding of the economic structure, detailed analysis and collective judgment of economic cycles and market maturity, as well as strong corporate evaluation, assessment and administration. Putting these demanding requirements into consideration, it would be much easier and practical to be just a trader.

As an independent trader, the most practical way to enhance yourself is to conduct trading based on real market situation. This is not as challenging as you might think. Everyone is born with this potential.