When trading securities, the strategy you choose will determine how you will manage your portfolio going forward. From a broader perspective, investing involves two main contrasting strategies -active investing and passive investing.
An active investor buys and sells securities to benefit from short-term price movements. On the other hand, a passive investor has a long-term horizon in mind. They buy and hold assets without much concern about daily movements. Passive investors usually track and duplicate the performance of market benchmarks such as the Nasdaq or S&P 500 while active investors aim to beat the market.
Some investors prefer an active trading strategy to a passive one, especially in volatile markets. If you want to go down this route, there are various trading options you may want to consider such as day trading, scalping, or swing trading. An example of swing trading is where you buy a security at the end of a trend hoping to profit in the intervening volatile period before a new trend establishes itself. Read on for an overview of each of these active trading methods.
A day trader buys and sells securities within a day to benefit from the intraday movements in the price of the securities. This method requires meticulous market monitoring, and it is big on speculation.
To be successful in day trading, you must develop a deep understanding of the market, the risks involved, and the products available on your trading platform. Also, chances are high that you will use leveraged trading where you borrow capital to take larger positions. It is important to note that leveraged positions can amplify your profit but also expose you to larger losses in the case of unfavourable price trends.
Other than amplified profits, the other outstanding benefit of day trading is that it saves you from overnight risk. Holding securities overnight can expose you to substantial unexpected moves that could potentially wipe your gains or even the initial invested capital. Before you jump in, analyze your risk tolerance and if necessary, put a protective stop to your position to minimize losses.
As the name suggests, swing traders focus on short to intermediate-term market movements or swings. The secret sauce to swing trading lies in the trader’s ability to identify trend continuity and reversals.
The entry point for swing trade is when a trend breaks, and price volatility sets in. Before the new trend establishes itself, a swing trader takes a position to benefit from the peaks and valleys in the price of a security.
To set trading rules, swing traders use fundamental and technical analyses. Technical analysis involves studying trading chart patterns to identify levels of support and resistance. Technical indicators such as relative strength index and moving averages go a long way to define the strength of trends and when a reversal is likely. Large-cap securities with high liquidity are the best targets for swing trading.
Also known as scalp trading, scalping is the fastest active trading method. It capitalizes on supply and demand imbalances to exploit bid-ask spreads. A scalper opens and closes positions within short periods some lasting seconds while others may take a couple of minutes.
Scalpers’ main objective is to grab as many small gains as possible during the busiest trading hours. As per market observations, securities are more likely to make multiple small moves for every large move. Typically, scalpers would open and close about a few hundred positions daily with all trades closed by end of the day.
If you are thinking about scalping as your active trading strategy, you must be prepared to spend a lot more hours glued to your screen doing chart analysis. You also must have fast fingers, be impatient, and think fast.
Investing is all about preferences, risk tolerance, and strategic moves. Active as opposed to passive investing will require that you get involved and more intensely so for some methods such as swing and scalping. Your objective must be clear going into a trade to avoid sinking into losses where you could have potentially secured a profit. The trading platform that you choose also plays a key role in how far you can go with active trading.