Stock Trading Strategies for Active Traders

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Stock Trading Strategies for Active Traders

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 found among passive or indexed investors. Active traders 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. Here are four of the most commonactive trading strategies and the built-in costs of each strategy.

Key Takeaways

  • Active trading is a technique that includes ‘beating the market’ by selecting and timing lucrative deals, which are frequently held for short periods of time.
  • Day trading is one of the most interesting tactics since it involves initiating and closing positions inside the same trading day.
  • Position trading necessitates investors holding stocks for a little longer period of time, necessitating patience as the deal develops.
  • Swing trading largely depends on technical analysis to determine when to enter and leave positions.
  • Scalping takes advantage of pricing discrepancies, though it often requires larger amounts of upfront capital to make larger profit.

4 Common Active Trading Strategies

1. Day Trading

Day trading is perhaps 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 within the same day.

When day trading, positions are closed out within the same day they are taken, and no position is held overnight. Traditionally, day trading is done by professional traders such as specialists or market makers. However, electronic trading has opened up this practice to novice traders.

  • Seize immediate volatility opportunities in the market

  • Holding overnight subject to post-market or pre-market pricing puts no money at risk.

  • Among the most exciting, fast-paced methods of trading

  • Due to greater order volumes, you are more likely to incur several transaction fees.

  • Requires more time and attention to execute

  • Smaller incremental earnings are more likely to arise than larger gains.

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2. Position Trading

Some people see position trading as a buy-and-hold technique rather than active trading. Position trading, on the other hand, when done by an experienced trader, might be considered active trading.

Position trading use longer-term charts ranging from daily to monthly in conjunction with other approaches to assess the current market trend. Depending on the trend, this sort of transaction might continue from days to many weeks, or even longer.

To assess a security’s trend, trend traders look for consecutive higher or lower highs. Trend traders want to profit from both the up and down side of market movements by getting on and riding the “wave.” Trend traders attempt to anticipate market direction but do not attempt to foresee price levels.

Typically, trend traders enter a position after the trend has established itself, and when the trend breaks, they leave the position. This implies that trend trading is more difficult during moments of significant market volatility, and its holdings are often decreased.

  • Often less stressful than other methods of active trading

  • Easy to implement strategies even with low leverage

  • Technical analysis techniques that reveal trading indications are widely used.

  • Requires strong technical analysis background

  • Recognizing long-term changes in asset prices sometimes requires patience.

  • Small variations may result in earnings shifting to losses.

3. Swing Trading

Swing traders generally enter the market when a trend breaks. Price volatility is common near the conclusion of a trend when the new trend attempts to establish itself. Swing traders purchase or sell when price volatility occurs. Swing trades are often kept longer than a day but for a shorter period of time than trend transactions. Swing traders often develop a set of trading rules that are based on technical or fundamental research.

These trading rules or algorithms are intended to determine when it is appropriate to purchase and sell a security. While a swing-trading algorithm does not need to be precise in predicting the peak or valley of a price move, it does need a market that moves in one way or the other. Swing traders should avoid markets that are range-bound or sideways.

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  • Often requires less time and attention than day trading

  • Has higher potential for larger returns per trade

  • May be able to trade while the markets are closed

  • May miss out on greater profits while chasing part of trends

  • Has higher potential for larger losses per trade

  • Holdings that are more centralized; open fewer, more concentrated positions

4. Scalping

Scalping is one of the most rapid tactics used by active traders. It essentially comprises recognizing and exploiting bid-ask spreads that are somewhat larger or narrower than typical owing to transient supply and demand mismatches.

A scalper does not seek to capitalize on huge changes or deal in large numbers. Rather, they strive to profit from tiny, frequent swings with measured transaction volumes.

Because the reward per trade is tiny, scalpers seek for very liquid markets in order to maximize the frequency of their transactions. Scalpers, as opposed to swing traders, seek tranquil markets with little volatility.

  • Often do not need to have strong technical background

  • There is less market risk since transactions may be made on less volatile assets.

  • Can still earn profit, even with small price variations

  • Typically necessitates a large number of orders, resulting in greater transaction costs.

  • Often requires a large initial investment to earn even moderate returns (because to the tiny amount of profit each deal).

  • Among the most time-consuming strategies

Costs Inherent With Trading Strategies

There was a time when only professional traders used active trading methods. Having an in-house brokerage company not only lowers the expenses of high-frequency trading, but it also assures better transaction execution. Lower fees and greater execution are two factors that boost the strategies’ profit potential.

To properly apply these tactics, significant hardware and software acquisitions are often necessary. These fees, in addition to real-time market data, make active trading relatively costly for the individual trader, albeit not entirely impossible.

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This is why buy-and-hold passive and indexed strategies have reduced fees and trading expenses. Furthermore, when selling a winning investment, passive investing often leads in lesser taxable events. Nonetheless, since they hold the broad market index, passive methods cannot outperform the market. Active traders seek alpha in the belief that trading returns would surpass expenses, resulting in a profitable long-term strategy.

How Do I Start Active Trading?

When actively trading equities, there are many tactics to consider. Some demand a highly analytical and technically solid background, while others depend heavily on computer setups and a significant time commitment. Regardless your strategy, you must have enough cash on hand to engage into positions big enough to start making potential rewards.

Is Day Trading Profitable?

Day trading is not for everyone, and for many, it is not the most rewarding investment technique. Day trading, on the other hand, is one of the most thrilling tactics for buying and selling shares. Furthermore, since positions are often completed at the end of the trading day, there is little long-term risk while day trading. Day trading may be successful, but success is never assured, as it is with many other types of investment.

How Do I Swing Trade?

Swing trading is primarily reliant on identifying patterns in financial markets using technical analysis. A swing trader would often hold a security for a short amount of time after purchasing it until the asset has climbed in value to the trader’s desired selling price. The trade’s entry and exit points are predetermined in advance based on prior price activity.

The Bottom Line

Active traders may use one or more of the tactics listed above. However, before using these solutions, examine the risks and costs associated with each.

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