If you are trying to figure out how much money you can make in stocks in one month, you are probably interested in short-term trading. Short-term trading usually refers to day or swing trading, which means timeframes measure from as little as a few minutes to as long as a couple of weeks. Unlike buy-and-hold investors, short-term traders rely more on price data and approaching catalysts than fundamental data or belief in a company’s management team.
The 2021 short squeezes of GameStop Corp. (NYSE: GME) and AMC Entertainment Holdings Inc. (NYSE: AMC) convinced a new generation of retail investors that short-term trading was an easy way to make quick profits. If you owned shares before the squeeze and sold into the frenzy, there’s a good chance you made substantial profits. However, for a much larger majority, buying shares of GME and AMC in early 2021 was an endeavor in capital annihilation.
The truth is that short-term trading is hard. Day and swing traders grind through chart after chart, applying different indicators and looking for the tiniest edge. And when the trading session begins, they must approach their positions dispassionately and be ready to pivot at a moment’s notice. Today, we’ll look at what influences stock prices in the short term and explore how to correctly manage risk when trading in short timeframes.
How Much Money Can You Make Through Short-Term Trading?
Setting realistic return expectations for short-term trading is crucial. Understanding technical analysis and market volatility is an excellent starting place for new traders. Then, you can develop a strategy and research historical returns of similar strategies across market sectors. Due to frequent price swings, short-term trading often involves higher risk. Consider your personal risk tolerance and adjust your expectations accordingly. Setting specific and achievable goals will help avoid unrealistic expectations and emotional decision-making.
How to Find Short-Term Stocks to Invest In
Even if you set modest profit goals, you’ll need to become comfortable with market volatility when looking for short-term stocks. The market may return 6% to 8% annually, but that doesn’t come from a steady three or four basis points of daily gains. Short-term prices can bounce for seemingly no reason, which is why so many investors ignore short-term data in favor of long-term fundamentals.
While long-term investing is safer, short-term trading can still be profitable — but you need to know what to look for. Here are some tools and strategies to consider when trying to find stocks that are about to move:
- Technical Analysis: Indicators like the Relative Strength Index (RSI), moving averages, or candlestick chart patterns can help identify ideal entry or exit points on volatile stocks.
- Market Sentiment: In 1936, John Maynard Keynes famously referred to this concept as ‘animal spirits’ when describing how emotions like greed and fear can influence markets, especially in volatile sessions. Surveys and social media activity can gauge market participants' temperatures during these periods.
- Screeners and Backtests: Practice makes perfect, so utilize some of MarketBeat’s Stock Screeners to identify stocks matching your preferred criteria and see how your strategies would have performed in the past.
What Influences Short-Term Trading Results?
Stock charts often look like Richter scale readings from day to day, so how can traders know what truly moves the market? Usually, no single event causes stock price gyrations, but instead, a combination of factors pulls prices from multiple directions. Here are a few factors to consider when researching short-term investments.
Market Volatility
Volatility can be hazardous to navigate, but without it, stocks wouldn’t make sizable enough moves for short-term trading to be viable. Predicting volatile moves before they occur is one of the key reasons short-term traders embrace technical analysis, which uses past price data to inform future trends. If you’ve ever wondered why a stock made a significant move on no news, consider what the underlying technical signals might be saying.
Economic & Global Events
Fundamental data often takes longer to materialize in stock prices, but that doesn’t mean a poor employment report or surprise election results can’t trigger an immediate selloff. Stocks prefer predictability, so short-term trading can be volatile when unexpected economic or global events occur.
Timing & Liquidity
Long-term investors don’t need to worry about timing the market — they’re invested every day. However, short-term traders must pick their spots and enter and exit positions at ideal moments. Additionally, the timing of your trade can be completely thrown off if there’s not enough liquidity to unload the stock. Liquidity is often the underlying reason for outsized moves; it shows each stock's supply and demand.
Earnings Reports
One benefit of using earnings in stock analysis is that companies announce in advance when they’ll release results and speak to analysts. If the data in an earnings report surpasses (or fails to meet) analyst expectations, the stock can swing wildly in the succeeding sessions. Earnings reports are public data; you can follow along or read transcripts at MarketBeat.
The Risks of Short-Term Trading & How to Mitigate Them
We’ve been told short-term trading is risky, but what exactly are the individual risks of day or swing trading? This list is by no means comprehensive, but here are six primary risks to keep in mind:
Market Volatility
Market volatility can be a friend or an enemy when trading in short periods. While we need some market volatility to produce price swings that enable short-term profits, elevated or unexpected volatility can poke holes in even the sharpest investment plans.
Emotional Decision-Making
Perhaps the most significant risk is sending your investment plan to the backseat in favor of emotional decisions. In professional poker, this is called ‘tilting,’ which often happens following an unexpected loss. Maybe you had an outstanding trade thesis, but the market turned against you, and now you’re angry and want to return all that lost capital at once. Stick to your investment plans and never go off script (or worse, use more margin) just because you had a poor outcome.
Transaction Costs
Emotional decision-making often leads to overtrading, which introduces another profit leech to the equation: transaction costs. While most brokers offer commission-free stock and ETF trades, you still pay a spread on each trade. And derivatives like options and futures are still frequently tagged with some type of commission or fee. Be sure to factor transaction costs into your profit-and-loss calculations.
Over-Reliance on Technical Analysis
Technical analysis is a valuable set of tools, but it is not a treasure map to stock riches. Just because the RSI is reading oversold doesn’t mean the stock is guaranteed to rebound. Use a variety of technical indicators in your investment analysis, and remember that these tools provide probabilities, not certainties.
Lack of Diversification
Betting the house on a coinflip trade might be exhilarating, but it's also an excellent way to blow up your account in the first week. Overtrading is bad; however, you don’t want to under-trade either and leave yourself exposed to only two or three companies. Be sure your portfolio is diverse enough that a bad trade or two won’t completely sink it.
Illiquidity
Imagine you’ve executed a short-term trade and hit your profit target, so it's time to exit the position. But when you attempt to sell shares back into the market, you discover a risk you failed to consider: lack of counterparties. Illiquid stocks can be hazardous for short-term traders because even if the price moves in your predicted direction, you still need a willing buyer to take shares off your hands to reap any profits. And if no buyers materialize, you could be stuck in a position far longer than you’d prefer.
How to Calculate Your Short-Term Trade Profits
Keeping a journal might sound childish, but you do need to document your trades in an easily accessible manner. Clear profit and loss results will show examples of what works and what doesn’t, allowing you to update your strategies and eliminate unprofitable ideas. You can also use tools like MarketBeat’s Stock Profit Calculator to run through hypothetical trades and track different results.
Are You Ready to Try Your Hand at Short-Term Trading?
If you want to try short-term trading, you first need to understand the risk and set realistic expectations. Not all short-term trades are profitable, and they don't always generate a large return in a month. But opportunities like the GME and AMC short squeezes are out there for for experienced investors who understand technical analysis, market psychology, and their own strengths and weaknesses as traders. It's important never to invest more than you can afford to lose, and always talk to an advisor before making significant changes to your financial plan. If you’re prone to emotional trading or don’t have time to study charts and learn technical signals, long-term investing might be a better option for you.
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