What Is Tactical Trading?
Tactical trading (or tactical asset allocation) is a short-term investment strategy based on predicted market trends or short-term changes in outlook based on fundamental or technical research. Tactical trading is taking long or short positions in a variety of markets, ranging from stocks and bonds to commodities and currencies.
Diversified long-term portfolios will often incorporate a tactical trading overlay, which entails dedicating a portion of the portfolio to short-term and medium-term trades in order to increase total portfolio returns.
Tactical asset allocation differs from long-term strategic asset allocation.
- Tactical trading is making short-term investment choices based on expected price fluctuations in an asset or market segment.
- As opportunities occur, tactical trading may entail long or short bets in a broad variety of markets and asset types.
- Tactical trading is often more difficult and risky than traditional long-term (strategic) trading tactics, requiring significantly more attention and research.
- Tactical trading is often stacked on top of a larger strategic asset allocation.
How Tactical Trading Works
Tactical trading is a kind of active management in which the emphasis is on trends or technical indicators rather than long-term fundamental study. Technical analysis is usually more significant in tactical trading techniques since it may aid in tracking market patterns and establishing appropriate entry and exit positions.
Tactical traders may strive to profit from short-term market oddities, or they may follow their investments more responsibly in an active approach that takes into account substantial changes in the investing environment. Because tactical trading is more focused on the short term, these investors will often utilize both technical and fundamental research in their investment selections.
Tactical Trading Considerations
Tactical traders often pursue more aggressive trading tactics than just purchase and hold. This form of trading might be useful when investing in cyclical assets, which can vary significantly in various investing conditions. It is also employed by investors who are looking for short to medium-term profit possibilities that arise throughout markets when new events occur.
Tactical trading is often more difficult and risky than traditional long-term trading tactics. Tactical trading may also have tax ramifications, necessitating an expansion of the investor’s due diligence examination to include capital gains taxes.
Tactical traders may monitor movements in a business that have an immediate impact on its bottom line, such as sales, revenue, and profits. The investor may also utilize technical charts while attempting to schedule an investment in order to profit from how changes impact the stock price. Technical charts may display a broad range of patterns, channels, trends, and price ranges that can be utilized to discover lucrative entry and exit positions at the discretion of the investor.
Tactical traders, on average, will employ a greater variety of resources in their investment selections to find both short and intermediate profit chances. They may also take both short and long positions based on how market changes influence possible investments.
Tactical Trading Opportunities and Strategies
Several basic economic drivers are recognized to have distinct impacts on asset prices across worldwide markets. Sovereign interest rate policies are one of the most prevalent drivers of global market fluctuations. Governments change interbank borrowing rates to encourage credit borrowing by government agencies, private-sector businesses, and people. When interest rates climb, investors find new fixed-income investments more appealing. When interest rates fall, businesses may cut their cost of capital, improving their bottom line profitability. Following federal interest rates and interest rate movements is an essential issue that tactical traders should monitor to ensure their portfolios are adequately matched with the current investment climate.
Many additional broad market triggers exist, such as changes in labor market circumstances, altered international tariffs, global oil production discussions, different levels of metal commodity output, and varying levels of agricultural commodity production.
Global macro investment solutions are used to institutionally manage the myriad elements impacting market conditions. The most complete forms of tactical trading techniques are macro and global macro investment methods. Hedge funds use these tactics, which are also accessible via publicly traded managed fund schemes. Macro strategies strive to manage a portfolio with the purpose of detecting and benefitting from tactical investing centered on macroeconomic developments that the investment manager anticipates will have a favorable or negative impact on certain assets. Macro strategies may benefit from all forms of developments in the investment market by using both short and long positions.
Example: Smart Beta
Smart beta investing is a tactical trading approach that combines the advantages of passive and active investment methods. Smart beta index building criteria differ from typical market capitalization-based indexes, often include a lean toward certain industrial sectors, value vs. growth (or vice versa), or specific market capitalizations.
There is no one technique to designing a smart beta investment plan since investors’ objectives might vary depending on their requirements; nevertheless, some managers are prescriptive in discovering smart beta concepts that are value-creating and economically logical. Equity smart beta attempts to overcome inefficiencies introduced by market capitalization-weighted benchmarks. To address this risk, funds may adopt a thematic strategy, concentrating on mispricing caused by investors seeking short-term profits, for example.
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