Active trading is the act of purchasing and selling off securities on the basis of short-term movements while having the goal of making a quick profit. As Scott Tominaga mentions, this trading style is in contrast to passive investing wherein the approach is to purchase and hold over the long term. Modern traders tend to use a dynamic range of tools and strategies for active trading, which includes leveraging fundamental, quantitative and technical analysis.
Scott Tominaga talks about a few popular active trading strategies
Active traders might trade a wide range of financial instruments like bonds, stocks, commodities and currencies. They may even use futures and derivatives to hedge their positions or increase potential returns. When it comes to active trading strategies, there are four common approaches to follow, which are:
- Scalping: Scalping involves profiting from small price movements in a security. Scalpers typically hold a trading position for a short span of time, ranging from a few seconds to a few minutes. They aim at generating gains from small price fluctuations. The transaction fees and the bid-ask spreads have to be considered by traders using the scalping approach. Owing to the frequency of trades made by the scalper, such costs can end up being pretty high if not managed in an efficient manner. Scalping also requires high focus, proper discipline and quick decision making, as scalpers must enter and exit positions swiftly to take advantage of small price movements
- Day trading: In short term trading strategy, securities are purchased and sold off within the same trading day. Day traders strive to profit from price movements in a security and generally close all of their positions by the close of the market trading day. Day traders might be individual traders, or even work for large financial institutions like banks and hedge funds
- Swing trading: In this approach, securities are purchased and held for a few days to a few months. The prime goal of swing trading is to enjoy gains from short term price movements in the market, which involves purchasing securities when prices are low and selling them off when prices are high. Swing traders must effectively manage sudden and unexpected moves in the market that may lead to losses. They need to also stay informed about market trends, stick to their trading plan and avoid emotional trading decisions.
- Position trading: This approach involves holding positions in securities for an extended period of time, typically from months to years or even decades. The key goal of position trading is to profit from the major market trends instead of short term price movements. In most cases, position traders make use of fundamental analysis to identify securities that are undervalued or overvalued. They hold these positions for the long term, and wait for the market to correct itself. Position traders can even use technical analysis to identify optimal entry and exit points.
As Scott Tominaga mentions, when trading in financial markets, it is common for people to encounter several trading strategies. They may even find that their success using one strategy does not mirror someone else’s success. Ultimately, it would be up to the trader to decide which would be the appropriate trading strategy for them to follow, as per their available resources, risk appetite and more.