How to understand the essence of short-term trading?
Short-term trading is quite in line with human nature because it allows for quick results and immediate gratification of human desires.
However, the biggest problem with short-term trading is that while many people engage in it, few can do it well. I have also been involved in short-term trading for a long time, so let me share some core experiences from my own practice.
1. Short-term trading is not about making a fortune all at once; it's about accumulating small profits.
In my previous short-term trading, I had an obsession with making a quick fortune, but what I got in return was a series of margin calls.
Short-term trading involves quick entries and exits, and market fluctuations follow patterns. Most of the time, space is exchanged over time, and the speed of short-term trading determines that each profit will not be very large, unlike trend trading where one can hold onto a huge profit.
Therefore, the accumulation of profits in short-term trading relies on: accumulating small profits, not short-term windfalls.
Moreover, short-term trading is fast, with short holding periods, and after closing a position, one can start a new trade, so the trading frequency is relatively high.
For short-term trading, it is essential to understand and accept the true source of profit. You cannot covet the high frequency brought by short-term trading while also desiring the high profits from trend trading; you cannot have both.
2. For short-term trading, choose varieties with a large range and pay attention to trading costs.
Different varieties have different fluctuation ranges. Within the same time period, varieties with larger ranges have more room for fluctuation, as shown in the image below.In the image, the left side is a 5-minute candlestick chart of gold, and the right side is a 5-minute candlestick chart of the British pound against the US dollar.
A similar 5-minute downward trend is observed. Gold fell by 140 points, while the pound only fell by 38 points. When engaging in short-term trading with the same holding time, gold offers a greater profit potential.
Therefore, when engaging in short-term trading, one should choose a trading instrument with significant market fluctuations, as those with minimal fluctuations do not yield profits.
Additionally, high trading frequency increases transaction costs, so one must pay attention to whether the fees and spreads are normal (some people may be charged several times the normal fees). Sometimes, it's not a lack of skill that prevents profitability, but rather the often overlooked trading costs.
3. Seek high success rate trading opportunities.
Short-term trading involves short holding periods, and the profit per order is relatively small. Therefore, it is even more crucial to have a high success rate in our trading strategies to ensure overall profitability. Technically, we need to identify trading opportunities with high success rates.
Short-term trading usually involves smaller trading cycles. My common approach is to filter trading opportunities and improve the success rate and stability of trades by adopting a strategy of "trading the small based on the large."
There are two most common methods:
One is to first identify support and resistance levels on a larger scale, and then enter the market for short-term trades during small cycles when the market tests these support and resistance levels, and when the probability of a rebound or reversal is relatively high.Imagine this scenario: after a 4-hour chart tests a significant support or resistance level, the likelihood of a reversal or bounce in the market is quite high. Whether it's a bounce or a reversal on the 4-hour chart, there is ample room for profit in short-term trades on the 5-minute or 15-minute timeframes.
Another approach is to only engage in short-term trades that align with the larger trend when the trend is clearly defined on a larger scale. In such cases, not only is the success rate of trend-following trades higher, but one can also moderately increase the risk-to-reward ratio, much like pushing a boat downstream, which is both light and swift.
4. Appropriately use compound interest.
Short-term trading has a small stop-loss space, a high success rate, and a high frequency of trades. Once the account starts making profits, one can increase the position through the method of compounding interest.
You can compound by increasing the amount of principal, for example, when you have 10,000 yuan, you open 1 contract, when you have 11,000 yuan, you open 1.1 contracts, and so on. The heavier the position as you go, the greater the profit.
By relying on compound interest, even short-term trades can gradually yield significant profits.
5. Maintain a clear and calm mind.
Short-term trading is the most susceptible to emotional highs because you are constantly immersed in the market, watching the constant fluctuation of the candlestick charts, which can easily lead you astray. This is also why I later switched to medium-term trading, as the frequent resistance against human nature feels quite uncomfortable.
If you are truly committed to short-term trading, you must overcome your emotional issues. For instance, becoming overly excited when you make a profit, becoming irritable and angry when you are frequently stopped out, or even losing your rationality, underestimating the risks of trading, overestimating the success rate of trades, and frequently trading impulsively, are all common occurrences in short-term trading.Maintaining rationality and composure in short-term trading is essential for success in this field, and it often requires an unusually stable emotional state. This can sometimes be a natural talent, but it can also be developed through deliberate practice acquired later in life. However, the process of honing this skill is certainly not pleasant.
These points are essentially the distilled wisdom I've gained from my experience in short-term trading. The language may be plain, but the lessons are profound, all accumulated through hard-earned experiences and lessons learned the hard way.