The performance of short-term operations consists of opening and closing a position, short or long, for a few days. Is short-term trading the same as trading? The answer is, it depends. By trading means a way of trading where we can carry out several transactions per week. In these cases, the most used method to determine when to enter and exit the market is Technical Analysis. In this article, we will describe commercial transactions and other types of short-term transactions, but they do not need to be considered as trading.
Trading as technical analysis
Trading is the strategy that almost all investors think of when they hear the term “short-term trading”. This is not surprising, considering that trading is based on short-term operations . The short term may even last less than 24 hours (intraday operations). Generally, derivatives are used when the transaction occurs in a very short period (hours or days): For small transactions CFDs, Forex and Warrants are used; Although for larger transactions, options and futures are more widely used.
In any case, when trading is done , technical analysis , graphics, is generally used . Because? Because, in the short term, the direction of the quote may have little to do with the true value of the asset. So, it makes more sense to analyze the behavior of the recent price (Technical Analysis) than the fundamentals of heritage (Fundamental Analysis). Technical analysis uses historical prices, the use of oscillators, technical indicators, supports, resistances, etc. In the graph below, we can see a technical analysis of Iberdrola.
The keys to conducting the trading correctly are:
- Emotional Control : Don’t get carried away by the emotions of a positive or negative streak. Do not deviate from the trading strategy.
- Monetary management : Operate with stop loss and profits, always with a risk to profit ratio greater than 1 to 3 or more and risking 1% or less of our capital.
- Many practices : In negotiation it is essential to devote time to training and practice. Basically there will be no success without studying the technical analysis.
Coverage of positions or portfolio
When we already have a portfolio of stocks or ETFs, it may be interesting to protect it when we think we are at a market limit or when an unexpected event occurs. What does portfolio coverage consist of ? Hedging is generally done on equity portfolios, which must be maintained over the long term, when short term expectations are low. Next, we take short positions with CFDs in equities or ETFs where we have a long position.
Short positions allow us to compensate for the temporary decline of the long position , so that during the time that the asset is being corrected, the profitability of our portfolio is not affected, since we cover it in this case with CFDs. The advantage of covering with CFDs is that, being derivatives, we will need a smaller amount than the long position (thanks to the lever).
Covering our portfolio is not as simple as it sounds. The difficulty in doing them correctly is in time. When is it time to open the cover ? And to close it? In some circumstances, it can be very difficult to know the perfect time to execute a hedging strategy, more if we don’t know if a correction is really going to start or not. It is not normal to achieve complete correction of the long position, but if we can cover part of the fall, we will be partially covering the position.
Finally, at what level do we close the cover ? We have two alternatives. First, we can try to reach the hedge by the end of the correction through technical analysis, materializing the proceeds from the sale of CFDs. Second, we could expect the correction to be completed by closing the cover at the same level as it was opened. Finally, we can close the hedge position when the correction is a certain percentage, for example -10%.
Operate relevant facts
The relevant facts (FR) are the documents published by the companies listed on the CNMV. These documents are published because they report important events: Presentation of results, Dividends, Strategic Plans, capital increases, etc. What to do in these situations ? In the short term, we can benefit from the market’s reaction to increased volatility as a result of a Material Fact (FR). Being listed companies, we can use shares and derivatives (CFDs or Warrants).
To operate human resources, we must take into account the following points and answer the following questions:
- Is it an expected event ?: Capital increases, Acquisitions of other companies (OPA), etc.
- Is that what you expected ?: Results, dividends, strategic plans, etc.
- Was the FR information already known? Was it already discounted?
- How will investors react?
- In companies that announce pre-competition from creditors, or that are going through a delicate financial situation, their price drops sharply and then recovers in the short term. For example, on the morning of November 24, 2015, Abengoa announced a pre-contract with creditors. In the following chart, from the Degiro platform, we can see the sharp drop and then its recovery:
- In OPAs (when one company acquires another) it is generally paid more per share than the price at which it is quoted. This causes the acquiree’s shares to increase to the price established in the takeover bid. For example, at the end of 2012, Metrovacesa’s share price increased + 214% when it was acquired.
- Inputs and outputs of the Ibex : This is an effect that may have less force at present, since it is generally known information in advance and, therefore, is discounted before the index entry / exit. However, in the past, it was a very profitable strategy.
- In capital increases : It is very common to see how the price of the subscription right falls when they are quoted. This is because it is the time when the vast majority of investors who plan to sell their rights do so.
Operate macroeconomic events
Increases / decreases in interest rates, industrial production, Central Bank meetings, oil reserves, inflation, etc. All of these events can cause changes in asset prices : stocks, currencies, bonds, commodities, etc. These changes can last for days or even hours when they have little relevance. When some important news about the supply of oil appears in the media, oil prices are affected. Likewise, changes in interest rates will have a direct impact on bonds and banking companies.
To operate this type of events, we must follow the same points as in the previous section : Ask if the event is discounted, whether it is an expected event or not, etc. Trade events are not easy and we need to be very clear about what the market will be doing and predict any possible scenario.