Short-Term Trading: The Space Between Day Trading and Buy & Hold

Most investors understand the concepts of day trading and buy and hold. The philosophies are
popular, but worlds apart. Somewhere in the middle sits short-term or swing trading, and it’s
becoming more and more popular among investors looking for healthy returns, without the
constant monitoring of day trading and the long wait periods associated with buy and hold
strategies.

The shift to short-term trading from other trading types can often come down to one’s trading
personality.

Case in point: Matt Choi who founded and leads trading education company, Certus Trading.
Choi opted to focus on short-term trading in his trading career. One of the reasons why was
because he discovered early on in his career that he had little patience for buy and hold (“You’ll
go nuts not touching the stock,” he says).

Matt Choi’s former mentor, George Fontanills, also observed how Choi traded and decided that
swing trading fit him best. “He understood that I liked to travel but at the same time I just don’t
have the patience so, short to medium term time frame works best for me. So, now, fast
forward many years later, you know, I’m usually in my trade for a couple of days to a couple of
months, and this gives me enough time for the stock or futures, or a currency to move some
distance so that I can capture meaningful profits.”

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Matt Choi now teaches his students a range of swing trading strategies, such as the Bull Fly and
Bear Fly strategies and the Chicken Strangle.

Other examples of ways to take advantage of short-term moves in the market, include the
weekend effect and the January effect, according to Aswath Damodaran, author of a paper
called Smoke and Mirrors: Price Patterns, Charts and Technical Analysis.

The weekend effect is a phenomenon that has persisted over long periods and over a number
of international markets, Damodaran writes. It refers to the differences in returns between
Mondays and other days of the week. Over the years, returns on Mondays have been
consistently lower than returns on other days of the week, he notes.

Similarly, studies of returns in the United States and other major financial markets consistently
reveal strong differences in return behaviour across the months of the year, Damodran says.
“Returns in January are significantly higher than returns in any other month of the year. This
phenomenon is called the year-end or January effect, and it can be traced to the first two
weeks in January.”

The January effect is much more accentuated for small firms than for larger firms, he adds, and
roughly half of the small firm premium is earned in the first two days of January.

Fidelity Investments, which has studied short-term trading patterns, identifies a number of
different types, including gap ups and downs. Gaps occur when there is empty space between
two trading periods that’s caused by a significant increase or decrease in price. For example, a
stock might close at $5.00 and open at $7.00 after positive earnings or other news. There are
three main types of gaps: Breakaway gaps, runaway gaps, and exhaustion gaps. Breakaway gaps
form at the start of a trend, runaway gaps form during the middle of a trend, and exhaustion
gaps for near the end of the trend. Other short-term trading patterns identified by Fidelity
include hammers, shooting stars, gravestones, and the hanging man.

Like any other trading strategy, success requires trading knowledge and a firm understanding of
trading patterns and how one wants to take advantage of these patterns. Certus Trading’s
Matt Choi adds, “Successful swing trading strategies sometimes take years to test before their
performance is proven. But, from my experience, once they have passed those tests they are
added as another tool to achieve success as a trader.”

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