4 common active trading strategies

Active trading is the act of buying and selling securities based on short-term trends in order to profit from price movements on short-term stock charts. The mentality associated with active trading strategies is different from the long-term buy and hold strategies found among passive or index investors. Active traders believe that short-term trends and capturing market trends are where they make a profit.

There are a variety of methods that can be used to implement active trading strategies, and each method has the appropriate market environment and the inherent risks of the strategy. Below are the four most common active trading strategies and the built-in costs of each strategy.

Key points

  • Active trading is a strategy to “beat the market” by identifying and grasping profitable transactions, usually short-term holdings.
  • In active trading, several general strategies can be used.
  • Day trading, position trading, swing trading and scalping are four popular active trading methods.

4 common active trading strategies

1. Day trading

Intraday trading is probably the most famous way of active trading. It is usually considered a pseudonym for the active transaction itself. Intraday trading, as the name suggests, is a method of buying and selling securities on the same day. The positions were closed on the same day they were taken, and no positions were held overnight. Traditionally, day trading is done by professional traders, such as experts or market makers. However, electronic trading has opened up this practice to novice traders.

For those trying to exceed the market average, active trading is a popular strategy.

2. Position trading

Some people actually think that position trading is a buy and hold strategy, rather than active trading. However, position transactions completed by advanced traders can be a form of active trading. Position trading uses long-term charts-from daily to monthly-combined with other methods to determine trends in the current market direction. This type of transaction may last from a few days to a few weeks, sometimes even longer, depending on the trend.

Trend traders look for consecutive higher highs or lower highs to determine the trend of the security. By jumping on the “wave”, the goal of trend traders is to benefit from the upward and downward movements of the market. Trend traders focus on determining the direction of the market, but they do not try to predict any price level. Usually, trend traders jump into the trend after the trend is established, and when the trend breaks, they usually exit the position. This means that during periods of high market volatility, trend trading is more difficult, and its holdings are generally reduced.

3. Swing trading

When a trend breaks out, swing traders usually get involved. At the end of the trend, there will usually be some price fluctuations, as the new trend tries to establish itself. Swing traders buy or sell when price fluctuations begin. Swing trading is usually held for more than a day, but the time is shorter than trend trading. Swing traders usually create a set of trading rules based on technical or fundamental analysis.

These trading rules or algorithms are designed to determine when to buy or sell securities. Although the swing trading algorithm does not have to accurately predict the peaks or troughs of price fluctuations, it does require a market that moves in one direction or the other. A market with range fluctuations or sideways consolidation is a risk for swing traders.

4. Scalping

Scalping is one of the fastest strategies adopted by active traders. Essentially, it needs to identify and utilize the bid-offer spreads that are slightly wider or narrower than normal due to temporary supply and demand imbalances.

The scalpers will not try to take advantage of big moves or make large transactions. Instead, they seek to take advantage of frequently occurring small actions and pass measurable transaction volumes. Since the profit level of each transaction is very small, the scalpers will look for a relatively liquid market to increase the frequency of transactions. Unlike swing traders, scalpers prefer quiet markets where there are no sudden price fluctuations.

The inherent costs of trading strategies

Active trading strategies were once only adopted by professional traders for a reason. Having an in-house brokerage company can not only reduce the costs associated with high-frequency trading, but also ensure better transaction execution. Lower commissions and better execution are two factors that increase the profit potential of a strategy.

It usually requires a large purchase of hardware and software to successfully implement these strategies. In addition to real-time market data, these costs make active trading somewhat prohibitive for individual traders, although not entirely impossible.

This is why the passive and indexed strategy of buying and holding positions provides lower fees and transaction costs, as well as reducing taxable events when selling profitable positions. Nevertheless, passive strategies cannot beat the market because they hold the broader market index. Active traders seek “Alpha”, hoping that trading profits can exceed costs and develop successful long-term strategies.

Bottom line

Active traders can use one or more of the above strategies. However, before deciding to adopt these strategies, one should consider the risks and costs associated with each strategy.


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