WHAT IS SHORT-TERM INVESTING - Short-term
investing is a term we use to describe a position trade which may last any
where from several days to several weeks, or even as long as a month or
more.
Often times, those interested in daytrading incorrectly assume that all
trading must be completed on an intraday basis and/or that all trades must
be closed out by the end of the day. While this does often times reduce
the risk of holding over night, or for durations longer than a single day,
sometimes (not always) it can put you into a mind-set which can tend to
reduce your overall profits in the markets. Often times daytraders find
themselves "baby sitting" cash while looking for favorable trades to
place. While this isn't always bad, it can sometimes tend to reduce your
profits from trading.
If you keep an open mind about the markets, certainly it can be seen that
there are times when holding a position for longer than a single day can
be beneficial to your bottom line. Many times in our morning newsletter,
for example, we take up a position early in the week and hold a stock
for several days, if not longer. The reason for this is because while
intraday trades can be placed, often times slightly longer duration trades
which are based more on technical chart patterns can turn out quite
favorable if executed and managed correctly.
With this said, it should be noted that we are not prescribing a "buy and
hold" mentality. If anything, you need to be "on your toes" just as much,
if not almost more, with short-term investing as with daytrading. Often
times, profit taking and/or risk management needs to happen with just as
much speed in positions held for multiple days as with trades made on an
intraday basis. The only significant difference is that while managing
the trade, you also work to keep an open mind regarding the upside
potential of the trade over an extended period of time. In addition, you
try to not be so quick to take profits and move on. Having additional
patience, while perhaps protecting current profits (i.e. using a trailing
stop loss and/or taking some profits off the table) can result in quite
spectacular profits if you find yourself on the right side of a trade
which begins to advance in your favor. This is also true of short plays
which begin to fall.
While short-term trading is something that tends to take some getting used
to, the basic idea is that you want to attempt a trade in a stock which
you feel may have additional upside if held longer term (again, when we
talk "longer term" we may only be referring to a week or several weeks).
Typically, these would be slightly lower risk stocks which have basically
more reliable or predictable longer term charts behind them.
In addition to being careful regarding which stocks you select for
short-term investing, you also want to select your entry points extremely
carefully. It also tends to be more important to watch the overall market
and how it is trading in relation to the stock you select, in an overall
effort to give yourself a more or less favorable back-drop against which
to hold your position. Likewise, using an "average in" approach where you
buy limited shares at first to test the waters can be quite helpful.
Typically, unless you are quite familiar with the stock and/or company,
buying a stock which is tending to move favorably for you over time
(rather than one which is going against you) will produce the safest and
most favorable results - as long as you do not over pay in relation to the
ultimate price target. This is not to suggest that cost averaging cannot
or should not be used in some cases, however, again it is best to stick to
companies that you are more comfortable with.
Finally, as noted above, if the position does start to move in your favor,
some form of risk reduction should be considered. This can either take
the form for a trailing stop loss (we would recommend placing the stop
some place slightly below the most recent break-out level and/or at a
point which would tend to indicate a break down in the chart) and/or
through taking some profits off the table. In this area, often times if
you can take out your original investment, then the remaining shares can
be held basically with no cost basis and therefore no risk.
Regardless of how you actually go about managing positions which are held
longer than a single day, or whether you even combine short-term investing
with your normal daytrading at all, the basic idea here is to at least
consider and keep an open mind to holding [at least some] stock(s) as
slightly longer short-term investments when the potential upside and
benefits may outweigh the risks of being invested in the markets.
