In active trading, securities are bought and sold based on short-term movements to profit from price movements on a short-term chart. Investors who use active trading strategies differ from those who use a long-term, buy-and-hold strategy. The profits are made by active traders by capturing the market trend and capturing short-term movements.
Active trading strategies are implemented in a variety of ways, each with its own market environment and inherent risks. The following are four of the most common active trading strategies and their associated costs.
The first step. Trading on a daily basis
Among active trading styles, day trading is perhaps the most popular. The term is often used as a pseudonym for active trading itself. In day trading, securities are purchased and sold within one day as implied by its name.
During day trading, positions are closed out the same day they are taken, and no positions are held overnight. Professional traders, such as specialists or market makers, typically engage in day trading. Despite this, novice traders are now able to participate in this practice because of electronic trading.
The second. The position trading strategy
Some people consider position trading to be a buy-and-hold strategy rather than an active trading strategy. Nevertheless, position trading can be considered active trading when done by an advanced trader.
Position trading uses longer term charts – anywhere from daily to monthly – combined with other methods to determine the current market trend. It is possible for this type of trade to last for several days up to several weeks, and sometimes even longer, depending on the trend.
In order to determine the trend of a security, trend traders look for successive higher highs or lower highs. It is the aim of trend traders to take advantage of both the ups and downs of market movements by jumping on and riding the “wave.” Instead of forecasting prices, trend traders determine the direction of the market.
A trend trader usually enters the market after the trend has established itself, and exits when the trend breaks. Due to this, trend trading is more difficult in periods of high market volatility and its positions are generally reduced.
The third point. Trading in swings
In the event of a trend reversal, swing traders typically enter the market. As the new trend attempts to establish itself at the end of a trend, there is usually some price volatility. As the price volatility sets in, swing traders buy or sell. Unlike trend trades, swing trades typically last for a shorter period of time than trend trades. A set of trading rules is often created by swing traders based on technical or fundamental analysis.
The purpose of these trading rules or algorithms is to determine when to buy and sell a security. The swing-trading algorithm does not have to be accurate in predicting the peak or valley of a price move, but it does require a market that moves in either direction. Swing traders risk losing money in range-bound or sideways markets.
The fourth point. Investing in scale
Active traders use scaling as one of their fastest strategies. Essentially, it involves identifying and exploiting bid-ask spreads that are wider or narrower than normal due to temporary supply and demand imbalances.
Scalpers do not attempt to exploit large moves or transact in high volumes. The strategy relies on capitalizing on small movements that occur frequently, with measured transaction volumes.
In order to increase the frequency of their trades, scalpers look for markets with relatively high liquidity. Scalpers prefer quiet markets that aren’t subject to sudden price changes, as opposed to swing traders.
Trading Strategies Inherent Costs
Professional traders used active trading strategies once, and there’s a reason for that. An in-house brokerage house reduces the costs associated with high-frequency trading, as well as ensuring better trade execution.
Profit potential of strategies is improved by lower commissions and better execution.
In order to successfully implement these strategies, significant hardware and software purchases are typically required. These costs, along with real-time market data, make active trading somewhat prohibitive for the individual trader, although not impossible.
This is why buy-and-hold passive and indexed strategies offer lower fees and trading costs. In addition, passive investing typically results in lower taxable events when a profitable position is sold. As long as passive strategies hold the broad market index, they cannot beat the market. Trading profits exceed costs and make for a successful long-term strategy for active traders who seek alpha