Active trading refers to the act of buying and selling assets based on short-term movements to gain some profits from the price movements seen on a short-term stock chart. The idea that underpins active trading strategies differs from the long-term, buy-and-hold strategy.
The buy-and-hold strategy uses a mentality that suggests price movements over the long term will beat the price movements in the short-term. Because of that short-term movements should not worry the investors too much. On the other hand, active traders propose that short-term price movements and determining the market trend are where profits can be made, if done properly.
In this article, we’ll discuss the best active trading strategies fit for you, if you’re not one of the longer term investors.
Scalping
Scalping is one of the fastest strategies used by active traders. It includes exploiting multiple price gaps caused by bid-ask spreads and order flows. The strategy in general works by making the spread or buying at the bid price and selling at the ask price to receive the different between the two price points. Scalpers try to hold their positions for a short period, therefore reducing the risk associated with the strategy.
In addition, scalpers so not try to exploit large moves or move high volumes. Instead, they attempt to use small movements that take place frequently or move smaller volumes more often. Since the level of profits per trade is small, scalpers search for more liquid market to increase the frequency of their trades. And not like swing traders, scalper prefer quiet markets that are not susceptible to surprise price movements so they can likely make the spread repeatedly on the same bid-ask price.
Swing Trading
When a trend breaks, that’s where swing traders usually get in the game. At the end of the trend, there is usually some price volatility as the new trend starts to establish itself. Swing traders buy or sell as that price volatility sets in. Swing trades are commonly held for more than a day but for a shorter time than trend trades. Swing traders usually build a set of trading rules based on technical or fundamental analysis.
These trading rules or algorithms are designed to identify when to buy and sell a security. A swing-trading algorithm doesn’t have to be exact and predict he peak or valley of a price move, but it needs a market that moves in one direction or another. A range-bound or sideways market is considered a risk for swing traders.
Position Trading
Some actually consider position trading to be a buy-and-hold strategy and not active trading. On the other hand, if position trading is performed by an advanced trader, it can be a form of active trading.
Position trading uses longer term charts, which are anywhere from a daily to monthly chart, in conjunction with other methods to spot the trend of the current market direction. This type of strategy may be for several days to several weeks – and sometimes longer – depending on the trend.
Trend traders search for successive higher highs or lower highs to determine the trend of security. By jumping on and trying to ride the wave, trend traders benefit from both the up and the down of market movements.
