The traditional approach to investing is to purchase stocks and then hold them for the long term until they increase significantly in value, at which point you can profit from selling off the shares. However, many investors, also known as day traders, choose to invest in the short-term only, meaning that they are less interested in a company's long term outlook, but only in its day-to-day movements.
Identifying stocks to invest in for the short-term is just as tricky, if not trickier, than picking out stocks to keep for the long haul. This is because, instead of merely identifying a solid company and waiting for them to appreciate in value, an investor must take into account the vagaries of investor sentiment and other factors that may cause short-term volatility.
When choosing stocks, you should first look at the stock's technical indicators, including the stock's so-called momentum. The direction of the momentum will depend on the time line in which you are looking to invest. A swing trader, for example, will look at the momentum within a single hour, while another kind of trader may wish to look at the price direction over a week.
In addition to momentum, you should look at broader market sentiment about a particular stock. Regardless of the direction that a stock price is moving, the discussion of the company's future in the short term may be entirely different. For example, a company may see its price drifting upward, but there may be dark rumblings about upcoming earnings statements, where the profits are rumored to be much less impressive than the investors hoped.
When investing in the short term, it's critical that you look at trends, such as movements within the economy as a whole and within a particular sector of stocks. For example, if you are thinking of investing in a technology company, you will want to look at what forces are affecting tech stocks right now. These can affect the price of your prospective stock in the short term regardless of its actual financial health.
- "Investing For Dummies"; Eric Tyson; 2008