Home »

Four Active Trading Techniques

Capital Markets CIO Outlook | Tuesday, August 10, 2021

Active traders use scalping, which involves spotting and profiting from bid-ask spreads that are a bit wider or narrower than normal due to short supply and demand imbalances.

FREMONT, CA: The process of purchasing and selling shares based on short-term changes to profit from price movements on a short-term stock chart is known as active trading. The mindset of active traders differs from that of passive or indexed investors, who want to buy and hold for the long term. Short-term changes and seizing the market trend, according to active traders, are where the earnings are created.

There are various strategies for implementing an active trading strategy, each with its own set of market conditions and hazards. Four common active trading techniques are as follows:

Swing Trading

Swing traders generally enter the market when a trend breaks. There usually is considerable price volatility at the end of a trend while the new trend seeks to establish itself. As price volatility increases, swing traders purchase or sell. Swing trades are typically held for longer than a day but not as long as trend transactions. Swing traders frequently use technical or fundamental analysis to build a set of trading rules.

These trading rules or algorithms are used to determine when it is best to purchase and sell a security. While a swing-trading algorithm does not need to be precise in predicting a price move's peak or trough, it does require a market that goes in one direction or the other. Therefore, swing traders should avoid markets that are range-bound or sideways.

Day Trading

The most well-known active trading style is day trading. It's frequently used as a euphemism for active trading. Day trading is the practice of buying and selling securities on the same day, as the name suggests. Positions are filled and closed on the same day, and no position is retained overnight. Professional traders, such as experts or market makers, have traditionally done day trading. Electronic trading, on the other hand, has made this practice more accessible to newcomers.

Scalping

Active traders use scalping as one of their fastest methods. It includes spotting and profiting from bid-ask spreads that are slightly wider or narrower than usual due to short supply and demand imbalances.

A scalper does not try to profit from significant moves or deal in large quantities. Instead, they aim to benefit from tiny, frequent transactions with low transaction volumes. Scalpers aim for very liquid markets to maximize the frequency of their trades because the profit per trade is little. Scalpers, unlike swing traders, seek placid markets that aren't prone to large price swings.

Position Trading

Some think of position trading as a buy-and-hold technique rather than active trading. However, position trading can be considered active trading when done by a skilled trader. Longer-term charts, ranging from daily to monthly, are used in tandem with other approaches to assess the current market direction's trend. Depending on the trend, this type of transaction might last anywhere from a few days to several weeks, and occasionally even longer.

Usually, trend traders enter the market after the trend has established itself, and they quit the market when the trend breaks. This means that trend trading is more difficult during moments of significant market volatility, and its positions are often reduced.