Active trading is the process of selling and buying securities centered on the temporary movements in order to get yields on the short-term. It is significantly different from the methods in the long-term trading. The buy-and-hold strategy employs that the short-term movement should be ignored and traders must focus on the long-term basis. On the other hand, active traders believe that profits can be gained in the short-term movement and when monitoring the trends.
Several active trading strategies can be very useful in different market situations, but each of them also has disadvantages and risks. The following are these active trading strategies.
1. Position Trading
Position traders use a long-term market chart together with other methods that determine market direction and trends. Depending on the direction, it might get longer than days or weeks. Active traders look for a continuous lower high or a higher high in determining the security’s trend. By riding the movements, active traders try to benefit from the ups and downs of the market. Usually, they will jump on the wave when they see an established trend but exit when it breaks. This method is difficult to accomplish during a period with high volatility.
2. Day Trading
It’s the most popular strategy for active trading. As the name implies, it is the method of buying and selling securities during the same day. No positions are held up to the next day as they are immediately closed out on the same day shares are bought. This method is usually performed by experts such as market makers and specialists. However, beginners can still use this method through the help of electronic trading.
This type of trading is relatively difficult to do on the Philippine Stock Exchange because of costly trading transactions and the absence of an automatic stop-loss feature among brokers’ platform.
This is one of the quickest methods done by active traders. It is done by taking advantage of the different price gaps caused by order flows and bid/ask spreads. It works when the scalper buys at the bid price and then sells it for the ask price to profit from the difference between of the two. They will try to hold their positions in a little amount of time to avoid the risks in this method.
Also, they are not looking at the big movements or volumes. They focus on the frequent small movement and volumes. Liquid markets are the target of scalpers to increase their profit no matter how small. They also like a consolidating market to avoid the risk of sudden price movements. Scalping is done by spreading shares repeatedly from the same bid/ask price.
4. Swing Trading
The swing trader comes in when a trend breaks. Volatility builds up when a new trend is just building up. These traders will buy and sell when the volatility starts. They usually hold positions in a shorter-term than the trend traders. They usually make some trading rules established on fundamental and technical analyses, which are designed to identify the time for buying and selling securities.
A swing trader’s algorithm is not focused on predicting the highest price movement, but it determines the markets that move in one direction or another. This strategy is dangerous in sideways or range-bound moving markets.
These mentioned approaches can be used individually or as a combination of two or more. However, active traders should be careful about the pros and cons of each. Active traders should pick the strategy that suits their personality, discipline, time, and risk tolerance before deciding which trading style they should practice.