10/30/2017 4 Common Active Trading Strategies

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4 Common Active Trading Strategies

By Kristina Zucchi, CFA | Updated October 11, 2016 12:18 PM EDT SH

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Active trading is the act of buying and selling securities based on short-term movements to profit Gearing
from the price movements on a short-term stock chart. The mentality associated with an active Value Proposition
trading strategy di ers from the long-term, buy-and-hold strategy. The buy-and-hold strategy
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employs a mentality that suggests that price movements over the long term will outweigh the price
movements in the short term and, as such, short-term movements should be ignored. Active traders,
on the other hand, believe that short-term movements and capturing the market trend are where
the profits are made. There are various methods used to accomplish an active-trading strategy, each
with appropriate market environments and risks inherent in the strategy. Here are four of the most
common types of active trading and the built-in costs of each strategy. (Active trading is a popular
strategy for those trying to beat the market average. To learn more, check out How To Outperform
The Market.)

TUTORIAL: How To Analyze Chart Patterns

1. Day Trading
Day trading is perhaps the most well known active-trading style. It's o en considered a pseudonym
for active trading itself. Day trading, as its name implies, is the method of buying and selling
securities within the same day. Positions are closed out within the same day they are taken, and no
position is held overnight. Traditionally, day trading is done by professional traders, such as
specialists or market makers. However, electronic trading has opened up this practice to novice
traders. (For related reading, also see Day Trading Strategies For Beginners.)

2. Position Trading

Some actually consider position trading to be a buy-and-hold strategy and not active trading.
However, position trading, when done by an advanced trader, can be a form of active trading.

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Position trading uses longer term charts - anywhere from daily to monthly - in combination with
other methods to determine the trend of the current market direction. This type of trade may last for
several days to several weeks and sometimes longer, depending on the trend. Trend traders look for
successive higher highs or lower highs to determine the trend of a security. By jumping on and riding
the "wave," trend traders aim to benefit from both the up and downside of market movements.
Trend traders look to determine the direction of the market, but they do not try to forecast any price
levels. Typically, trend traders jump on the trend a er it has established itself, and when the trend
breaks, they usually exit the position. This means that in periods of high market volatility, trend
trading is more di icult and its positions are generally reduced.

3. Swing Trading

When a trend breaks, swing traders typically get in the game. At the end of a trend, there is usually
some price volatility as the new trend tries to establish itself. Swing traders buy or sell as that price
volatility sets in. Swing trades are usually held for more than a day but for a shorter time than trend
trades. Swing traders o en create a set of trading rules based on technical or fundamental analysis;
these trading rules or algorithms are designed to identify when to buy and sell a security. While a
swing-trading algorithm does not have to be exact and predict the peak or valley of a price move, it
does need a market that moves in one direction or another. A range-bound or sideways market is a
risk for swing traders. (For more on swing trading, see our Introduction To Swing Trading.)

4. Scalping
Scalping is one of the quickest strategies employed
by active traders. It includes exploiting various price
gaps caused by bid/ask spreads and order flows. The
strategy generally works by making the spread or
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buying at the bid price and selling at the ask price to
receive the di erence between the two price points.
Scalpers attempt to hold their positions for a short
period, thus decreasing the risk associated with the
strategy. Additionally, a scalper does not try to exploit
large moves or move high volumes; rather, they try to
take advantage of small moves that occur frequently
and move smaller volumes more o en. Since the level of profits per trade is small, scalpers look for
more liquid markets to increase the frequency of their trades. And unlike swing traders, scalpers like
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quiet markets that aren't prone to sudden price movements so they can potentially make the spread
repeatedly on the same bid/ask prices. (To learn more on this active trading strategy, read Scalping:
Small Quick Profits Can Add Up.)

Costs Inherent with Trading Strategies

There's a reason active trading strategies were once only employed by professional traders. Not only
does having an in-house brokerage house reduce the costs associated with high-frequency trading,
but it also ensures a better trade execution. Lower commissions and better execution are two
elements that improve the profit potential of the strategies. Significant hardware and so ware
purchases are required to successfully implement these strategies in addition to real-time market
data. These costs make successfully implementing and profiting from active trading somewhat
prohibitive for the individual trader, although not all together unachievable.

The Bottom Line

Active traders can employ one or many of the aforementioned strategies. However, before deciding
on engaging in these strategies, the risks and costs associated with each one need to be explored
and considered. (For related reading, also take a look at Risk Management Techniques For Active
Traders.)

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