5 Common Active Trading Strategies

Last Updated July 23rd 2021

8 Min Read

Trading, unlike investing, is considered an active form of activity in any market. It is true of the stock market as well where a trader buys and sells stocks for the short term to benefit from the changes in their prices. There are multiple forms of active trading and we look at the most common four strategies you could use to make returns.

So, instead of a passive approach seen in buying a stock and holding on to this for the long-term gains, an active trader watches price movements on a regular basis and aims to make profits in the short term.

The duration of active trading can be anything from a few seconds up to a few weeks or even months. To better understand these strategies in detail, let us take a closer look at what these are, their purpose and how these can help you find the ones that suit you best.

5 Common Active Trading Strategies

1. Scalping

You could say that scalping is the trading strategy with the shortest duration. While day trading (more on that in the next section) also is about settling positions taken the very same day, this one is even quicker.

Scalping is the process of watching price movements very closely and relentlessly looking out for opportunities where even the slightest of gains are exploited. Scalp traders are on the prowl and believe in booking profits at minute intraday price movements. The focus here is to end the day on a positive note even if it takes multiple trades to do that.

The ideal market condition for scalping is one that is liquid and sees plenty of movement. Typically, scalpers are more active when the market is at it busiest. Also, the more actively traded stocks are the best bet, given their price variation. The tighter the spread, the better it is for scalping.

Scalping is ideal for those who can handle the stress and spend long hours monitoring and executing trades. They also need to be patient and persistent with multiple wafer-thin gains that, eventually, can add up to a handsome overall daily profit.

2. Day trading

This is where most of the professional traders feature and day trading sees the most consistent action among all these four strategies. As the name itself suggests, any trade that happens – buy or sell – need to be settled before the trading day is over. Any position that is taken needs to be squared off by day end and nothing gets carried overnight. For day traders, it is the ups and downs a stock sees during one day’s trading session that matters.

Though there is the compulsion to settle positions by end of day, it also offers an advantage. There is zero exposure to any developments that can come about after the day’s closure and before the start of the next day’s business hours. Similarly, there is no risk arising from the extended holding of a position that is prevalent in swing or position trading.

That said it comes with its own challenges. As the job requires someone to be on board full time to be in touch with all the developments at the stock market, the day trader’s job is a full time one. Anyone with an existing job or an inability to monitor proceedings and be ready to take or square off positions will not be the right fit here.

Despite day trading being relatively fast and hectic, traders don’t act impulsively. They work with technical and fundamental data and analysis to base their decisions. There are also technical indicators that are used as reference points to see trends and patterns. Stochastic Oscillator, Moving Average Convergence Divergence and the Relative Strength Index are some of the oft used of these indicators.

Day trading is fast and requires a good grip on not just the basics but also on the goings-on in the market. It is also demanding and risky.

3. Swing trading

Coming to the middle end of the duration based trading strategies, swing trading fits in between day and position trading types. Swing traders are those who hold positions from the second day till three to four weeks. The goal here is to catch the beginning of a price swing of a stock and ride it through and exit as soon as the swing is completed.

Obviously, this is an extremely charts and data-dependent process and swing traders, typically, work with trading rules and charts that help decide which stock to buy and when to sell. There are algorithms created to forecast the price movement and the onset and potential conclusion of a swing.

Swing trading relies heavily on fundamentals and data on both historical performance and the likelihood of the formation and retention of a swing to help traders open and square positions. Also handy are strategies like breakout, momentum and trend and counter-trend trading. A swing trader chooses to profit from one swing rather than a series of ups and downs.

Understandably, the trading style does not require a constant minute to minute monitoring of a stock’s movement throughout the day. This makes swing trading ideal for anyone who has another occupation and has to divide his attention but is keen to trade more often than long term.

In short, swing trading occupies the space in between day trading and long-term trading in more ways than one. It is not just the duration of the position taken that differentiates swing trading from the other two. But it is both as a result and the opportunities of the mid-term duration of the trading that the strategy also differs.

4. Position trading

At the other end of the spectrum is the long-term trading strategy, also known as position trading. Here the focus is on monitoring and analysing the long-term price movement and its possibilities across a prolonged period. A trade entered into could be held on to for weeks and months and, depending on the case, years as well.

Unlike swing trading that tracks the beginning of a swing to its end to square a position, traders who position trade do not constantly track weekly and monthly trends. Nor do they react to occasional blips and fluctuations that are not brought about any by fundamental reasons.

Position trading is ideal for anyone who takes a keen interest in the world of stocks but does not have the time or the interest to take short term or frequent positions. With its largely passive approach to buying and selling, it may almost be considered an investment as much as a trade. But the difference lies in the intent of the purchase.

An investor buys not with any clear plan to sell, instead of looking to add to his portfolio and enjoy the dividends and other corporate action that accompanies the holding of the stock. The position trader, however, attempts to exit at the right time.

Check Out: 7 Tips On When To Buy A Stock And When To Sell A Stock

5. News trading

A news trading strategy, as the name suggests, involves investment decisions made after important news announcements are made. Anticipating certain news releases, a news trader uses the market sentiment to their advantage.

A news trader works almost like a day trader as they enter and close a trade on the same day. They also focus on trading when the market is heavily reactant to news developments. It could be immediately after the economic releases or news announcement or in anticipation of an announcement.

News traders normally focus on both unexpected news, like an unforseen occurrence like a natural disaster or a terrorist attack, and recurring news, such as an annual report, economic news release or the interest rate announcements. For recurring news, a trader can set up alerts for the news announcements and take advantage of entering and exit a trade at the right time. However, a trader has to give equal or more importance to market expectations and market reactions.

News trading is ideal for anyone who takes a keen interest in how the market operates and how certain announcements will affect the positions and the wider financial market.

News trading does come with its share of drawbacks. There is an overnight risk, if trading positions are left open overnight.

At the end of the day, it is up to you to decide the best trading strategy that will work for you. There is no hard and fast rule to stick with just one strategy. You could combine the different approaches and find a successful trading technique for yourself.

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