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Common active trading strategies

Active trading may be described as buying and selling any financial securities to profit from price changes in the short term. This is very different from the approach followed by the value investor who believes in buying and holding securities because he believes that he will be better off in the long term and can therefore ignore short-term profit opportunities. The mentality or the trading style of the active trader is to concentrate on short-term movements and trends and the activity is generally based on short-term trading charts and patterns. Here are some of the more common active trading strategies but you must understand that any strategy that you execute must be in consonance with your trading style and your appetite for risk. The market environment also plays an important role in the selection of strategy.

Day trading is probably the most popular and well-known active trading strategy and many people use the term interchangeably with active trading. In day trading, you buy and sell securities during the same trading day in such a fashion that your position is completely squared off by the end of the trading day and no positions are carried forward. The advent of the Internet and electronic trading has opened up the prospects to the average retail investor whereas, previously, only large financial institutions and market makers had the privilege. The major advantage of day trading is that you can obtain a higher leverage as well as lower transaction costs because positions are not carried forward. You are also insulated from adverse overnight price movements in the market. A day trader is entirely focused on and guided by intraday charts.

Position trading is often regarded as buy and hold rather than active trading but this really depends on the trading timeframe of the individual trader. The objective is not intraday trading but trading with short timeframes so as to quickly capitalize on price changes. The position trader uses charts that can vary from daily to monthly and, in combination with other tools and techniques, attempts to establish the price trend in the market. Typically these traders use analysis to try and establish trends on which they can ride. You must bear in mind that they do not forecast specific prices and attempt to make money whether the market is trending upwards or downwards. Trend traders have to take extra care in the size of their positions when the markets are highly volatile.

Scalping is an active trading strategy in which the active trader seeks to cash in on small profits on a continuous basis and ensures that the accumulation is enough to provide him with a satisfactory return. For instance, scalpers will buy at the bid price and sell at the ask price to realize the bid/ask spread. Scalpers tend to follow low-risk strategies and do not look for substantial price movements because they only hold their positions in the short term, often a matter of minutes. Their principal tool tends to be the one hour chart and they can execute several trades in a single day if the conditions are right. Unlike other forms of active trading, scalpers prefer relatively stable markets because of the small margins with which they operate.