When to use what, when you are a short term or long term trader

Many of you are still struggling to find out if you are a short-term trader or a long-term investor? It is important to identify that beforehand because from a technical perspective the graphs can look a whole lot different. The other wisdom around investing is that a short-term trade should never become a long-term investment, especially if they are on CFD’s, as the interest might hurt you over some time!

I want to highlight some key differences on technical graphs one would use if you were a short-term trader vs a long-term investor.

Short-term traders look at daily or hourly graphs. I don’t care what justification you have, if you trade on a 5-minute graph, please, make an appointment to see your doctor. Using a 5-minute graph is trying to hit a 10cm target while on a speed boat at 220 miles an hour.

Long-term investors use weekly graphs. In other words, you will have to wait for the Friday close to have the complete graph for the week. I know the textbooks say wait for the Friday close and act on your decision on Monday, but through the years we have realised that sometimes we must pre-empt it a little otherwise you might miss it completely.

If we talk about short-term traders, it is a position you hold for less than 3 months. Medium-term investors, a 3 to 6-month period and long-term investors, longer than 6 months. In this extremely fast and ever-changing market, we very rarely look at a monthly graph, unless you want a 5 to 10-year view on an instrument.

The meaning of the candles remains the same no matter what time frame you are using. Long shadows at the bottom of the candles imply that the buyers are protecting the price to higher levels and long shadows at the top of the candles imply that the sellers are keen to take the price lower.

The moving averages are where things get interesting. Many of you know by now how we love golden cross and death cross formations. For the newbies a golden cross formation is when a shorter moving average breaks upwards through a longer moving average from the bottom up. This is usually a good bullish signal.

A death cross formation is where the longer moving average breaks downwards from high levels through the shorter moving average, usually a strong bearish signal.

Short term traders use 3 & 8-day moving averages or the 10-day moving average as a sentiment gauge.

Medium term traders use 26 & 9-day moving averages or the 50-day moving average as the sentiment gauge.

Long term investors use the 100 or 200-day moving averages on daily graphs and on weekly graphs the 20 or 40-week moving average.

The textbooks say that your daily and weekly graph needs to be in alignment (both oversold or both overbought) before you take a long term position.

If you are a short-term trader your hourly and daily graph needs to be in alignment (both oversold or both overbought) before you take a position. However, this often means that you will miss out on some opportunities and won’t be trading as often. This is why we prefer as short-term traders to stick only to daily graphs and long term investors to stick to weekly graphs.

If you have been around for a while on any of our subscriptions or TV/Radio shows you will know by now that we love the stochastic indicator. It is not as volatile as an RSI and not as slow as a MACD. This is a great indicator to use to identify overbought or oversold levels and once the divergence is there, you can cast your line into the water.

Just like you must play around with some moving averages on EVERY graph you look at to see which moving average highlights strong support and resistance the best, you must also try different indicators to see if they all highlight optimism or not.

Keep in mind there is no such thing as the perfect indicator and in technical analysis we all work with possibilities and probabilities.

Hope this will help you to have a short-term or long-term strategy and to stick to it!

See you soon.


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