Master the key secrets of short-term trading: from identifying the right timing to risk management

Short-term trading, commonly known as day trading, refers to a trading approach with a holding period ranging from a few days to several weeks. This type of trading features high risk and high reward, where a single position may be closed within minutes or held for several days. The success or failure of short-term traders hinges on their ability to accurately capture buy and sell opportunities, as well as how they protect their capital in volatile markets.

The Essence of Short-term Trading and Trading Environment

A Highly Speculative Trading Method

Short-term trading is unrelated to a company’s fundamentals; the focus is on following capital hotspots and capturing short-term price fluctuations to profit from price differences. Often, the assets traded are highly volatile but not necessarily of high quality, because short-term trading seeks to profit from time differences rather than corporate growth. Unlike long-term investing, short-term traders profit from market sentiment and capital flow opportunities.

Win Rate Determines Profit and Loss

Compared to traditional investing that emphasizes fundamentals, short-term trading emphasizes the probability of winning trades. This is why many experienced short-term traders use backtesting software to verify their strategies, ensuring their strategies are executable.

The Three Major Types of Trading Opportunities in Short-term Trading

Primary Opportunity: Clear Trend Waves

Market environments with sufficient amplitude, longer duration, and relatively clear trends are most suitable for short-term trading. These opportunities usually occur in the middle of a clear unilateral trend.

Secondary Opportunity: High-Frequency Small Fluctuations

Although the market may not have large swings, small cycle fluctuations occur frequently. Short-term traders can accumulate profits by capturing each wave’s rhythm through multiple trades. This environment is often seen in wide-range oscillation zones.

Risk Opportunity: Extremely Volatile Fluctuations

Affected by major news, stocks may show overbought or oversold conditions with abnormal volatility. Without solid technical skills, traders risk making profits but also facing losses and potential liquidation.

How to Accurately Identify Potential Trading Opportunities

Overcoming the Trap of News Temptation

A common mistake among investors is relying too heavily on financial news to determine buy and sell points. In reality, by the time news is released, the market has already partially digested it. True opportunities lie in the market’s expectations and reactions to events. Therefore, thorough fundamental analysis is necessary to grasp the right timing for trading.

Step 1: Observe Moving Averages

Moving averages are the most commonly used technical tools in the market, helping to predict price trends and identify dynamic support and resistance levels. When prices are above the moving averages and the averages are sloping upward, it indicates an uptrend; conversely, a downward trend is indicated when prices are below and moving averages slope downward. Short-term traders should utilize moving averages to determine the current main trend direction.

Step 2: Understand the Four Phases of Market Cycles

Market movements typically go through four cycle phases, each with different trading characteristics:

Range Consolidation Phase - The market has no clear direction, with prices oscillating between predictable highs and lows. Bulls and bears repeatedly tug, and prices are trapped within an equilibrium range. This phase usually ends with a breakout; the longer the range persists, the stronger the breakout. Traders should check volume to determine whether it is a true or false breakout.

Breakout Initiation Phase - The market breaks inertia, and prices begin to form a clear trend. Sometimes this manifests as a straight ascent driven by fundamental changes, or as a gradual higher high and higher low upward movement. During this phase, moving averages start to slope upward significantly, serving as an important reference for entry.

Price Reversal Phase - After reaching a high, the stock price begins to reverse. This may appear as a sharp plunge (due to worsening fundamentals) or as a gentle decline with gradually lower peaks and troughs. The key is to pay attention to the speed and magnitude of the decline.

Uncertainty Phase - After a round of movement, bulls and bears are exhausted, and the market falls into confusion. Volatility is intense but directionless, making technical indicators less reliable. Investors are advised to stay away from the market during this phase.

Step 3: Judge Market Trend Direction

Trends can be long-term, short-term, upward, downward, or sideways. Following the trend is the fundamental rule of short-term trading—buying in an uptrend and shorting in a downtrend. When the overall trend contradicts the trading direction, the probability of success drops significantly.

Step 4: Adjust Trading Mindset

Many blame poor psychology for losses, which is understandable. Paper trading can be easy, but real trading often results in frequent losses due to psychological issues. A correct short-term trading mindset should include:

• Absolute control of emotional fluctuations, avoiding being swayed by price swings
• Establishing a comprehensive capital management system
• Properly recognizing that losses are normal trading costs
• Prioritizing risk control over profit, and strictly adhering to stop-loss discipline

How to Choose Short-term Trading Targets

Turnover Rate Drives Returns

The secret to short-term trading lies in amplifying gains through high turnover. Therefore, target selection focuses less on fundamental quality and more on trading characteristics.

Ideal short-term targets have three features:

Market Hotspots - Stocks with current trending news or market attention that can easily attract capital.

High Trading Activity - Sufficient participation from buyers and sellers, facilitating entry and exit without slippage.

Significant Price Fluctuations - Large amplitude to create profit space, which is exactly the environment short-term traders need.

Such targets often appear during periods of intense market volatility or when companies release major news (financial reports, restructuring, new products, etc.).

Technical Analysis Is Key

Short-term trading has weaker correlation with a company’s long-term fundamentals. Even promising companies may experience pullbacks or consolidation. In such cases, traders should switch to technical analysis—finding support and resistance levels for range trading or riding the trend until reaching the next key level.

Five Major Strategies for Short-term Trading

Strategy 1: Moving Average Convergence Breakout

When the stock price begins to rise with a small increase, and the moving averages are diverging into a bullish arrangement with a daily turnover rate around 3%, wait patiently. When the price retraces to the 5-day moving average, buy decisively.

Strategy 2: Contrarian Bullish Signal

During a market decline, if certain stocks rise over 5% against the trend with significantly increased volume, it indicates independent capital favoring them. Consider buying at the close of the day or during the next day’s pullback. “If it doesn’t fall, it will rise”—this is the principle.

Strategy 3: Sharp Drop Rebound Bottom Fishing

After a rapid rise, stocks suddenly plunge sharply with decreased volume—be cautious. When the decline exceeds half of the previous rise, consider entering to catch a short-term rebound.

Strategy 4: Multi-Cycle Resonance Entry

When the monthly and weekly charts are at low levels with volume accumulation, the 3-day moving average is rising with volume, and the 60-minute chart shows a volume increase forming a golden cross, with continuous volume and frequent large buy orders, it indicates the stock is in the early stage of a hot sector. This is an ideal entry point for short-term trading.

Strategy 5: Stop-Loss and Take-Profit Discipline

If a misjudgment leads to buying at a low point and the price continues to fall, stop-loss immediately. When the price reaches your psychological target, take profit promptly—avoid greed.

Market Realities Every Short-term Trader Must Know

The market always looks forward. It reacts to everything happening now—fiscal policies, global economic conditions, political environments, geopolitical events, etc. That’s why technical analysis is especially important for short-term traders. By studying price movements, volume, moving averages, and other technical indicators, traders can often identify market turning points earlier.

Final Advice

Short-term trading is a common approach, aiming for relatively small but stable gains, with increased trading frequency. When practicing short-term trading, it’s essential to recognize a few basic facts:

1. Short-term market oscillations are unpredictable; probabilities always exist
2. Controlling losses is more important than pursuing profits
3. Profits only occur when prices move significantly in our favor
4. Time accumulation is the foundation of generating returns

Successful short-term traders excel at identifying trading opportunities, effectively managing risks, and flexibly applying technical analysis to achieve long-term stable profits.