Many newcomers to the stock market would be happy to earn money with long-term investments with minimal effort and time expenditure, but the size of their deposit does not allow for it. They try to master deposit acceleration techniques, and as a result, they often lose their invested money. At the same time, there are quite safe ways to make a solid profit on short-term market fluctuations. So, how to earn money with short-term investments? A step-by-step guide will help beginner investors quickly and safely increase their capital.
From this article you will learn:
- Short-term investments require careful analysis of market conditions and news background both before opening a position and during its maintenance, in order to make informed decisions about entering and exiting trades.
- Choosing exit targets and strategies is crucial for minimizing risks and maximizing potential profit in short-term investments, and includes assessing strong resistance levels, using volatility indicators, and setting Stop Loss orders.
- Following a step-by-step instruction helps novice investors quickly and safely increase their capital in short-term investments, provided they choose profitable assets, an adequate time frame for trading, and strictly adhere to trading rules and strategies.
5 Steps For a Short-Term Investor
To earn money on short-term investments, you need to:
- Choose assets correctly. Stocks, currencies, and futures contracts are suitable for making good profits. All of them are considered income-generating assets. Although the risk level is considered quite high, there is always an opportunity to choose less volatile ones. Moreover, risk reduction methods also work in the short term.
- Determine the investment period. You can find stories online about how people make money on binary options in a matter of minutes. But such “exciting stories” are better left for those who don’t need money at all (you can only lose them in such “investments”). An adequate investor will choose a reasonable trading interval, lasting from 5 to 30 days.
- Know what to do. The entire short-term trading instruction fits into just 5 simple steps.
Step 1. Market Analysis
First of all, any investor (short-term included) is interested in the overall market situation. A market participant working with stocks and funds evaluates it based on key stock indices. Of course, national indices are of primary interest. For example, American indices like the S&P 500 and Nasdaq 100 not only reflect the situation in the US stock market but also serve as a good indicator of the overall global market.
To assess the behavior of indices, make rough forecasts of their dynamics, and evaluate market prospects, the investor needs to:
- Monitor key events affecting the market: publication of economic indicators, corporate reports, geopolitical events, and other important global events.
- Use technical analysis tools.
- Pay attention to intermarket analysis. This term refers to the influence of one asset market on the behavior of another. For example, the yield of government bonds, which depends on central bank rates, can have a significant impact on stock prices.
- Conduct market sentiment analysis. Abstract conclusions like “Highly likely bearish sentiment prevails in the market” are not enough here. You also need to track indicators such as the VIX on the American market and its Russian equivalent, the volatility index, yield curves of government bonds, and others.
Moreover, to confidently trade in the short term, you need to know the medium-term market situation. This will not only allow you to track the main trends but also filter out “market noise” that arises due to demographic, technological shifts, and more.
Step 2. Choosing Assets for Trading
Investors investing in stocks face a choice between growth and value stocks, cyclical and defensive instruments. Of course, those who intend to maximize profits in short-time intervals are more interested in income-generating instruments – growth stocks with high volatility and cyclical stocks, which show significant price growth depending on the phase of the business cycle and economic news.
To select specific securities, they will need to be compared based on certain indicators. For stocks, the beta coefficient can be used as such an indicator. This statistical coefficient shows how the dynamics of the asset exceed the dynamics of the benchmark (it is recommended to choose the corresponding stock index as such a benchmark). For example, if the calculated beta for a stock is 3, statistically it will grow by 6% while the index will only add 2%.
Beta also determines the level of risk for the security, so it is not recommended to choose assets with a value above 2. Stocks with a beta of one are also uninteresting. Thus, the optimal option will be securities for which the beta coefficient is in the range of 1.5-2. Suitable securities can be found in the IT, telecommunications, and consumer sectors (manufacturers of second-necessity goods).
Step 3. Determine the Market Situation for the Selected Asset
This stage involves conducting technical analysis for the selected stocks to determine the best entry point and movement potential. To solve this problem, the following are used:
- Readings of oscillators, for example, RSI in the overbought zone.
- The current price level relative to strong levels and support/resistance zones.
- Formation of reversal patterns on price charts.
Trading is recommended on four-hour or daily timeframes (H4 or D1). When choosing the best security, it is better to take into account not only the indicators of a single indicator (for example, RSI), but to analyze the entire volume of available information. For example, the oscillator transitioning into the overbought zone when the price consolidates around a strong support level may indicate a high probability of an upward price impulse.
Step 4. Evaluate the News Background at the Time of Position Opening and Holding
The publication of macroeconomic indicators and the release of other news can act as powerful triggers for initiating price impulses and drivers for movement development. Therefore, assessing the news background when entering into a transaction and afterward is a necessary condition.
It should be considered before entering the market. The necessary information is provided in the economic calendars. They not only publish the date and time of events but also past and forecasted values of indicators. Quite often, analytical materials with reviews of possible scenario developments also appear. This information should be taken into account; it will help avoid making a deal in the wrong direction and assess the potential profitability of positions.
Step 5. Determine Goals
At the final stage, the investor should find an answer to the question of under what conditions to close a position. Targets mentioned in analytical reviews are unlikely to deserve attention because they are calculated for an annual interval and are not revised frequently.
It is better to assess movement targets based on strong resistance levels, Fibonacci levels and extensions, boundaries of price channels, or volatility indicators (such as Bollinger Bands). It is also possible to close positions based on time.
It is also essential to provide for closing positions in a negative scenario. To do this, set a Stop Loss, preferably short (at a ratio of 1:2-3 to the profit fixation level).
Overall, short-term investments can yield significant profits with an adequate level of risk. To realize this potential, it is necessary to choose income-generating assets and a time interval for trading, followed a simple step-by-step instruction. It is better to implement it into a strict trading system, where not only the rules of opening and closing positions are specified but also the criteria for choosing a specific investment instrument, principles of capital management, and risks.