4 Common Active Trading Strategies

Active trading is the act of buying and selling trading instruments in a relatively short time to profit from short-term price movements. The mentality associated with active trading strategies distinguishes it from long-term strategies. This strategy requires a mindset that indicates that long-term price movements will dominate short-term price movements. In other words, short-term movements should be ignored.

Conversely, active traders believe in short-term movements and capture market trends when generating profits. There are many methods used to implement active trading strategies, each related to the right market conditions and the inherent risks of that strategy. To discuss this further, here are the four most common types of active trading.

1. Day Trading

Day trading seems to be the most well-known style of active trading, often considered the very definition of active trading itself. Day trading, as the name suggests, is a method of buying and selling on the same day. Transaction positions are closed on the same day as when the buy and sell occur. Traditionally, day trading is conducted by professional traders, such as specialists or market makers. However, online trading systems have now opened opportunities for beginner traders to engage in it.

2. Position Trading

Some argue that position trading is a buy-and-hold strategy, and not active trading. However, when conducted by experienced traders, position trading can be considered active trading. Position trading uses charts with longer time frames – ranging from daily to monthly – combined with other methods to determine the current market trend.

This type of transaction can last for several days to weeks and even longer, depending on the price trend patterns. Traders who pay close attention to trends (trend traders) try to determine the direction of the market, but they do not attempt to predict every price level. Typically, trend traders follow the trend after the conditions are stable. When the trend stops, they usually exit their positions. This means that in periods of high market volatility, it is more difficult to trade based on trends, and generally, traders reduce their positions.

3. Swing Trading

When the trend stops, swing traders usually start to play. At the end of a trend, price volatility typically occurs in the market before a new trend forms. Swing traders buy or sell when price volatility occurs. Swing traders often create transaction formulas based on technical or fundamental analysis; these transaction formulas or algorithms are designed to identify when to buy and sell a trading instrument. Although swing trading algorithms do not have to be exact in predicting the peaks or troughs of price movements, they require a market that has confirmed its direction. Ranging or sideways market conditions are considered less favorable for swing traders.

4. Scalping

Scalping is one of the fastest strategies employed by active traders. Scalping involves exploiting various price gaps caused by bid/ask spreads and order flows. This strategy generally works by creating a spread or buying at the bid price and selling at the ask price to capture the difference between the two price points. Scalpers try to hold their positions for a short time while reducing the risks associated with the strategy.

Additionally, a scalper does not attempt to exploit on a large scale or move with large volumes; instead, they aim to take advantage of small movements that occur frequently, moving smaller volumes more often. Because the profit per transaction tends to be small, scalpers will seek more liquid markets to increase their transaction frequency. Unlike swing traders, scalpers prefer quieter markets that are not prone to sudden price movements, thus potentially generating spreads multiple times at the bid/ask prices.

Costs in Trading Strategies

There are several reasons why active trading strategies can only be executed once by professional traders. Not only to reduce the costs imposed by brokers related to high trading frequency, but also to ensure better order execution.

Lower commissions and better execution are two elements that enhance the profit potential of a strategy. Sometimes, traders also incur additional costs for hardware and software that are essential for the successful implementation of these strategies. These costs also play a role in determining the success and profitability of active trading, although they may seem somewhat expensive for individual traders and not all are beneficial.

Conclusion

Active traders can apply one or several of the strategies mentioned above. However, before deciding to use these strategies, the risks and costs associated with each strategy need to be calculated and considered.