Active trading can be defined as the process of buying and selling securities according to short-term movements to make a profit from the shift in the price level on a short-term stock chart. The purpose of an active trading strategy is entirely different from the long-term strategy whose aim is to buy-and-hold for a more extended period.
For instance, the buy-and-hold strategy is founded on a mindset that price movements over the long-term will prevail over the movements of the price in the short-term and suggest that movement in the short-term should be overlooked. Active traders believed that short movements and capturing of the market trend are where the profits lie.
Several techniques are employed to achieve an active trading strategy; each of these methods has the right market settings and dangers outlined in the strategy.
These are four active trading strategies that are used by most active traders; it also consists of its varied inherent fees for each method.
Without mincing words, day trading is the most popular active trading strategy among traders. Most often, it is used as a fictitious name for active trading. As the name suggests, day trading can be defined as the strategy that entails the buying and selling of stocks and securities on the same day. Those positions taken on that day are closed on the same day, and the strategy does not allow the holding of position until the following day.
Day trading is carried out by professional traders like market makers or specialists. Novice traders can also engage in day trading with the help of electronic trading/forex signals
Some traders often think of the position trading strategy as a buy-and-hold strategy and do not necessarily view it as active trading. Nevertheless, when this type of strategy is executed by a professional, it can be a form of active trading. Most often, position trading entails using longer-term charts such as daily and monthly charts with other techniques to understand the movement of the current market direction.
In this case, the duration of the trade may be days or weeks based on the trend. Most trend traders search for uninterrupted higher highs or lower highs to identify the direction of a security. These traders make a profit irrespective of the market movement as they jump on the trend and ride with the wave either in an upward or downward position. These trend traders appear to decide the market direction but do not make any attempt to predict the price levels. Most often, trend traders come on the trend as soon as it is established and they leave the position as soon as they notice a break in the trend. During the periods of high market volatility, trend trading is more complicated, and its trading positions are significantly lessened.
Swing traders come on board when the trend breaks. Usually, when there a trend is about to end, there is a presence of some price volatility when a new trend is about to establish its presence. As soon as that price volatility is confirmed, swing traders have a choice, and this is to either buy or sell. Most swing trades are held for more than a day but with a shorter timeframe when compared with trend trades.
Swing traders usually invent a series of trading rules established on fundamental or technical analysis. These rules are created to help traders understand the best time to sell or purchase security.
Though the swing-trading algorithm does not need to be accurate in its prediction of the highest or lowest point of a price movement, it requires the market to move in a specific trend. Most swing traders consider sideways or range-bound market a risky market to trade in.
One of the fastest strategies used by most active traders is scalping. It entails taking advantage of the several price gaps initiated by order flows and bid-ask spreads. This strategy is effective when security is purchased at the bid price and selling at the asking price, the profit, in this case, is the difference between both price points.
In a bid to lessen the risk in this strategy, scalpers are known to maintain their positions for a short period. Scalpers are experts when it comes to exploiting the little movements that happen more often and do not concentrate on higher volumes or more significant price movements. Scalpers search for more liquid markets to increase the number of trades as the profit level in each trade is relatively small. This set of traders also likes to trade in calm markets that are not renowned for unexpected price movements because it permits them to make repetitive spreads on same bid/ask prices, unlike swing traders.
Associated Costs With Trading Strategies
There is a genuine reason why professional traders used to apply active trading strategies. One of the major reasons is that an internal brokerage house lessens the fees of high-frequency trading. It also promotes improved trade execution. Better execution and lower commissions are two main factors that enhance the profit potential of the strategies. There is a need to purchase appropriate hardware and software as well as a robust real-time market data to ensure a successful implementation of these strategies. These associated expenses make active trading a complicated and unfeasible feat for the individual trader to attain.
The Bottom Line
Active traders can use the strategies mentioned above. It is important to note that there is a need to consider and explore the risks and expenses involved in each of the procedures stated above before taking the next step.