Not all investors are looking to invest for the long term. Some prefer shorter time frames and volatile stocks, hoping to make profits in days or weeks rather than years. While short-term investors can make big gains from time to time (like the 2021 meme stock short squeeze), day and swing trading is often about accumulating small gains and minimizing losses.
To get started in short-term trading, you need to understand why day and swing traders focus on different factors and concepts than long-term investors. Short-term trading requires technical skill, knowledge of market trends, and the ability to stay calm under pressure.
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How to choose the best stocks for short-term investment
Short-term traders use technical indicators such as moving averages, moving average convergence divergence (MACD), and relative strength index (RSI) to make investment decisions. Fundamental analysis is less useful in a short-term investor’s portfolio because long-term success indicators such as sales and profit margin growth have not had time to populate. Instead, they will look for signals that indicate a trend reversal or continuation, as well as potential catalysts that could create a short-term upswing.
Consider a variety of factors when searching for stocks with the potential to deliver short-term earnings growth. No single technical indicator has a 100% success rate, and even the most promising catalysts or product launches may not move a stock enough to meet your goals. When analyzing stocks, be sure to consider the following criteria:
Market volatility
Long-term investors ignore volatility and focus on long-term results measured over decades. 7% annual returns will do you great in 30 years. But short-term investors aren’t satisfied with 7% annual returns. If they want to make 10-20% gains in the short term, they need to embrace volatility. Short-term traders also need to tighten their risk tolerance parameters because they need to liquidate positions more quickly if their thesis doesn’t work.
Liquidity
When investing for short-term profits, liquidity often goes both ways. Stocks with fewer shares outstanding (float) can be more volatile with lower trading volume, as the share price rises without as much buying pressure. However, investors should also consider the other side of the coin when unwinding positions: sellers need buyers, and less liquid stocks can be difficult to sell outright once profit targets are met.
Company News
Earnings announcements, new product launches, hiring and departures, and analyst upgrades/downgrades can all be catalysts that affect stock prices in the short term. For example, if a company that has consistently beaten earnings expectations in the past falls short in one quarter, you may want to investigate further to see if this is a temporary drop in capital expenditures or the start of a downward trend in profitability.
Technical Signals
Last but not least, technical analysis will be at the forefront of most short-term trading activity. These signals signal the actions that technical traders take to enter and exit positions based on specific price data. Indicators such as MACD and RSI use moving averages to measure the direction and trend of stock price movement. Profit targets and stop-loss orders will rely heavily on technical trading data.
Top 5 Short-Term Stocks to Consider
Combining the above criteria, we have identified five stocks to consider when searching for short-term profit opportunities: These stocks vary in market capitalization and belong to a variety of equity sectors, but all have a combination of technical signals and upcoming catalysts that make them compelling candidates for short-term investment.
Sky West
$83.91 +0.31 (+0.37%)
(As of July 9, 2024)
52 week range $36.91
▼
$84.68
P/E ratio: 30.29
Target price $76.67
Investing in the airline industry is not for the faint of heart, but Americans continue to travel at a record pace, and SkyWest Corporation (NASDAQ: SKYW) is one of the biggest beneficiaries. SKYW stock has shown impressive momentum over the past year, significantly outperforming much larger competitors among U.S. airlines. SKYW stock is trading well above its 20-day, 50-day, and 200-day moving averages, and despite a rally of over 20% over the past three months, the stock is still not showing an oversold indication on the RSI. With its next earnings release on July 25, 2024 approaching, consider riding SKYW’s momentum a little longer.
Complete Solaria
CSLR
Complete Solaria
$1.49 +0.01 (+0.68%)
(As of July 9, 2024)
52 week range $0.20
▼
$16.00
Target price $6.00
Small solar technology provider Complete Solaria Inc. (NASDAQ: CSLR) recently observed a golden cross on its charts, an important technical signal that occurs when a stock’s 50-day moving average crosses its 200-day moving average. The golden cross is a well-known bullish signal, and CSLR’s stock price has more than doubled since the pattern formed in early May. Additionally, the stock has a small number of shares outstanding at 49 million, which could create serious volatility if trading volume continues to increase.
Tesla
$262.33 +9.39 (+3.71%)
(As of July 9, 2024)
52 week range $138.80
▼
$299.29
P/E ratio: 66.92
Target price $192.71
Let’s switch gears and look at stocks that may be in the midst of a major downtrend reversal. Few stocks have been mired as badly in the past as Tesla (NASDAQ: TSLA), due to the Cybertruck fiasco, slowing electric vehicle (EV) sales growth, and the distractions of mercurial CEO Elon Musk. But since the RSI hit an oversold reading, TSLA shares have rallied 18% in the last month, and shareholders recently approved Musk’s latest compensation package, which may reignite his efforts to boost the struggling EV maker.
Oppenheimer Holdings
$49.19 -0.12 (-0.24%)
(As of July 9, 2024)
52-week range $32.82
▼
$50.14
Dividend yield: 1.22%
P/E ratio: 13.26
One of the hottest breakout stocks for 2024 is investment bank Oppenheimer Holdings (NYSE: OPY). The firm has published countless analyst reports and price targets on publicly traded companies. However, OPY stock is riding bullish momentum, up about 29% over the past three months. The stock is trading above its 50-day and 200-day moving averages (the golden cross occurred in May), and the company made some high-profile hires in June and continues to expand globally.
Ligand Pharmaceuticals
ground
Ligand Pharmaceuticals
$91.71 +4.83 (+5.56%)
(As of July 9, 2024)
52-week range $49.24
▼
$94.57
P/E ratio 17.74
Target price $122.25
Ligand Pharmaceuticals, Inc. (NASDAQ: LGND) is a leading biotechnology company with a broad pipeline of drugs. The company currently markets medicines for multiple myeloma, lymphoblastic leukemia and lymphoma, kidney disease, diabetes, and more. In June 2024, LGND stock received a buy rating from HG Wainwright and Benchmark, and the stock has risen more than 18% year-to-date. Additionally, the stock chart shows a bullish MACD crossover signal, while the RSI is firmly below the oversold level.
Short Term Stock Trading Strategies
When developing a short-term trading plan, you need to set clear goals and know exactly where you want to take your profits (or cut your losses). Stop-loss orders are an important risk management step, especially when trading for minutes or hours. When trading with a short-term strategy, never risk more than you are willing to lose.
Day Trading: If you buy and sell stocks in a single trading session and don’t hold your position overnight, you’re called a day trader. Day traders must have the strictest profit and loss rules and often trade small caps and penny stocks to capitalize on the big volatility. Swing Trading: Swing traders also trade for shorter periods, but they hold stocks overnight (or several nights) and wait for technical signals or catalysts to move. Swing traders often look for special situations, such as short squeezes, that allow them to make big gains over the course of days or weeks. Scalping: Scalpers have the shortest trading times, holding positions for only a few seconds and looking for incremental gains of 3%, 4%, or even 5%. These traders trade dozens (or more) of times a day, trying to accumulate small gains while avoiding losses.
Risks and considerations in short-term trading
Short-term trading isn’t the glamorous life. It’s about toiling away in front of a computer monitor every day, ruthlessly whittling down losing positions while racking up as many winning trades as possible. You can’t “set it and forget it” like an investor with an index fund in a retirement account. Instead, you follow the markets religiously like a March Madness basketball bettor.
Market volatility and poorly timed trades can produce large losses, but active trading also brings mental distress and stress. You have to constantly track the market, absorb data, and adjust your holdings. Very few investors are consistently successful in active trading, and those who are successful must devote a great deal of time and energy to finding a winning strategy. Always maintain a diversified portfolio and never invest beyond your comfort level.
Short-term trading can bring quick profits, but investors must follow strict rules
Long-term investment is usually the safest form because investors with a long investment horizon can recover from downturns and their own mistakes. However, the shorter the horizon, the less margin for error. To be a successful active trader, you need to develop a trading plan, practice your techniques (preferably in a demo account), and never be too fixated on getting out of a losing position.
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