Stock Trading Strategies: Short Term Vs. Long Term
Are there differences between short term and long term trading
? There has been a lot of debate about the different approaches that traders should take depending on whether one is trying to profit in the short or long term. Traders are always looking for specific trading strategies that will work better in either the short or long term. However, the difference in trading the short term vs. long term should not dictate the trading strategy to be implemented. Instead, it should dictate the type of analysis that should be conducted to increase the probability of profit and to limit risk within the different time frames.Short-term vs. Long-term Traders
There are many types of short term and long term traders. Day traders are those individuals that are usually trying to take advantage of immediate changes in stock prices that can be achieved regularly and in some cases multiple times per day. Swing and trend traders are those individuals that look for changes in investor sentiment that can influence changes in stock values for periods of days and even weeks. The medium to very long term is left for those traders or investors that profit by forecasting the future growth prospects of firms demonstrated in quarterly and annual performance reporting.
In the long run, the price of stock is directly related to the profit making potential of the firm and its ability to grow its return on equity into the future. The short term movement in stock prices is more a function of the stock's trading clientele and the immediate supply and demand factors. This is why rumor and innuendo will usually only have a temporary affect on stock prices and why the truth about a company's ability to compete can significantly change the perceived share value for longer periods.
Three Types of Trading Analysis
There are three basic types of trading analysis that can be conducted to prepare a trade: technical, fundamental, and practical. Technical analysis helps determine price forecasts on the basis of historic pricing patterns. It attempts to determine the future actions of a stock's clientele in relation to what has transpired in the past. Fundamental analysis is more focused on company operations, its financial strength, and its growth prospects. Analysts try to determine future share price by determining future cash flows. Practical analysis relates to the ability to forecast stock price in relation to the news available on that stock. It requires taking action on information before it can be fully digested by the market.
The ability of each type of analysis to increase the probability of trading profits depends on the length of time that one expects to profit in. For example any trader that expects to turn a profit within days must conduct technical analysis to determine where the stock price could probably move. However, this forecast, based on the near past, will never trump current news as the basis for the current stock trend. There are many examples of stocks that have reached a historic level of resistance and were expected to turn overt that instead broke through to higher highs because of some news story that attracted new buyers at the new price level.
There is a place for fundamental analysis in making short term trades although it has much more value in determining long-term share price. When making a short-term trade it is important to understand a company's competitive environment and financial strength in order to avoid any fiscal surprises that could affect short-term pricing. However studying a long-term price chart will give little insight into current price fluctuations.
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