Active trading is the act of buying and selling securities based on short-term movements to profit from the price movements on a short-term stock chart. The mentality associated with an active trading strategy differs from the long-term, buy-and-hold strategy. The buy-and-hold strategy employs a mentality that suggests that price movements over the long term will outweigh the price movements in the short term.
Active traders, on the other hand, believe that short-term movements and capturing the market trend are where the profits are made. There are various methods used to accomplish an active-trading strategy, each with appropriate market environments and risks inherent in the strategy.
See Also: Skills That Every Trader Must Learn
Here are the common types of active trading and the built-in costs of each strategy.
Day trading is probably the most well known active-trading style. It’s often considered a pseudonym for active trading itself. Day trading, as its name implies, is the method of buying and selling securities on the same day. Positions are closed out on the same day they are taken, and no position is held overnight.
Some actually consider position trading to be a buy-and-hold strategy and not active trading. However, position trading, when done by an advanced trader, can be a form of active trading. Position trading uses longer-term charts – anywhere from daily to monthly – in combination with other methods to determine the trend of the current market direction. This type of trade may last for several days to several weeks and sometimes longer, depending on the trend.
Trend traders look for successively higher highs or lower highs to determine the trend of a security. By jumping on and riding the “wave,” trend traders aim to benefit from both the up and downside of market movements. Trend traders look to determine the direction of the market, but they do not try to forecast any price levels.
See Also: Why Trend Trading?
When a trend breaks, swing traders typically come in. At the end of a trend, there is usually some price volatility as the new trend tries to build itself. Swing traders buy or sell as that price volatility sets in. Swing trades are usually held for more than a day, but for a shorter time than trend trades.
Also, swing traders often create a set of trading rules based on the technical or fundamental analysis; these trading rules or algorithms are designed to identify when to buy and sell a security.
See Also: Learn Swing Trading
Scalping is one of the quickest strategies employed by active traders. It includes exploiting various price gaps caused by bid/ask spreads and order flows. The strategy generally works by making the spread or buying at the bid price and selling at the asking price to receive the difference between the two price points.
Scalpers attempt to hold their positions for a short period, thus decreasing the risk associated with the strategy. Additionally, a scalper does not try to exploit large moves or move high volumes; rather, they try to take advantage of small moves that occur frequently and move smaller volumes more often.
Active traders can use one or many of the above-mentioned strategies. However, before deciding on engaging in these strategies, the risks, and costs associated with each one need to be explored and considered as well.
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