Types of Active Trading Strategies
Active trading strategies is a very popular strategy for those trying to beat the market average. Active Trading is the act of buying and selling the securities based on short-term movements to profits from the price movements on a short-term stock chart. The mentality associated with active trading strategies differs from the buy and hold strategy and long-term strategy
The buy-and-hold strategy employs a mentality that implies the price movements over the long term outweigh the price movements in the short term, and short-term movement should be ignored. Active traders on the other side believe that the short-term movements and capturing the market trend are where the profits are made.
Various methods used to accomplish an active trading strategy, each with the appropriate market environments and risks inherent in strategy. Here are four types of active trading and the built-in costs of every strategy.
4 Types of Active Trading Strategies
1. Day Trading
Day Trading is the most well know active style. Is often considered an alias for active trading. Day trading is the method of buying and selling securities on the same day they are taken, and no position is held overnight. Traditionally, day trading is done by the professional traders such as specialists or experts.
2. Position Trading
Some consider the position trading to be a buy and hold strategy and not an active trading. However, Position trading when done by the advance trader can be a form of active trading. Position trading uses longer-term charts anywhere from the daily to monthly in combination with other methods to determine the trend of the current market direction.
Position Trading is a type of trade may last for several days to weeks and sometimes longer depend on the trend. Trend Traders look for successive higher high or lower highs to determine the trend of security. Trend traders aim to benefit from both the up and downside the direction of the market, but they do not try to forecast on any price levels. Typically, trend traders jump on the trend after it has established itself, and when the trend breaks, they usually exit the position. It means that in periods of high market volatility, trend trading is more difficult and its positions are reduced.
3. Swing Trading
When the trend breaks, swing traders typically get in the game. At the end of a trend, there is some price volatility as the new trend tries to set itself. Swing traders buy or sell as that price volatility sets in. Swing trades are normally held for more than a day but for the shorter time than trend trades. Swing traders often create a set of trading rules based on the fundamental or technical analysis; the trading rules or algorithm are designed to identify when to buy and sell a security. While a swing-trading algorithm doesn’t have to be exact and predict the peak of a price move, it does need a market that moves in only one direction or another. A range-bound or sideways market is a risk for swing traders.
Scalping is one of the fastest strategies employed by active traders. It includes exploiting the various price gaps caused by bid/ask spreads and order flows. The strategy works by making the spread or buying at the bid price and selling at the ask price to receive the difference between two price points. Scalpers attempt to hold their positions for the short period, thus decreasing the risk associated with strategy.
Additionally, a scalper does not try to exploit large moves or more that occur frequently and move smaller volume more often. Since the level of profits per trade is small, scalpers look for extra liquid markets to increase the frequency of trades. And unlike the swing traders, scalpers like quiet markets that are not prone to sudden price movements so they can potentially make spread repeatedly on the same bid/ask prices.