What is active trading?

The active trading definition refers to the act of buying and selling financial assets to generate quick profits from price movements by speculating on a short-term trend. It is typically done in highly liquid markets. Therefore, active traders commonly prefer to work with volatile stocks, forex and derivatives. They are continuously analysing the given markets, studying the trends and searching for patterns. Traders, who actively participate in the market, utilise a plethora of methods and strategies to achieve their trading goals. The active trading meaning implies that traders should always be ready to make a trade. For that reason, active trading requires the availability of myriad sources of information to maximise potential opportunities. 

Where have you heard about active trading?

If you are interested in financial markets and the way they work, you have probably heard about active trading many times. Your financial adviser or investment manager may have also mentioned the term as the opposed approach to the long-term buy-and-hold strategy, which is popular among indexed and passive investors.

What you need to know about active trading.

Active traders typically do not focus on long-term economic trends and tend not to hold assets for many months or years. If you want to become an active trader yourself, you should focus on strategies that are news-driven. Moreover, you have to participate in a high volume of trades to make profits, as the price swings that occur over a short period are usually relatively small.

As you gain more experience, you will eventually develop your own playbook of strategies that work best for you. All in all, it is important to be able to navigate in the current market environments and understand the risks involved in an active trading approach.

For active traders, technical analysis is one of the most attractive methods of analysing financial markets and choosing trading strategies. Moreover, this type of traders also make frequent use of limit orders. One of the examples is a stop-loss order, which uses a lower price point to limit downside on a trade, ensuring a maximum loss if the market moves against you.

There are various methods practiced by traders in active trading. Each comes with its own pros and cons. The four most popular types of active trading strategies include day trading, scalp trading, swing trading and position trading.

Usually, when people think about active trading, the first thing that comes to their mind is day trading. This strategy involves buying and selling of an asset within a single trading day to take advantage of small market changes. Those participating in this type of trade are usually professional traders who know exactly what assets to buy and when to sell them.

Scalp trading is the shortest-term style of active trading. Also known as scalping, it focuses on larger position sizes to take advantage of small price differences that occur over a very short term: from a few seconds to minutes. Rarely, it can last up to several hours. With this strategy, traders benefit from price gaps caused by the bid/ask price spread and order flows.

Swing trading is another form of active trading. It is a medium-term trading strategy that is used by traders who profit from price swings. Swing traders identify a possible price trend and then hold a particular asset for a period of time – from a minimum of one day up to several weeks – in order to generate profits.

Position trading slightly differs from the other three types of active trading. It encompasses the longest time-frame. A trader holds a position in security from several days to weeks to even years, depending on the trend. Typically, position traders get into a trade after the trend has established itself. Once the trend breaks, they exit the position. This type of trading most closely resembles traditional investing, with the essential difference being that passive investors are limited to only going long.

As an active trader, you can employ one or a combination of the above-mentioned strategies. However, before deciding which strategy to go for, you need to explore and consider all the risks and costs associated with each one.