So how do active trading strategies differ from a passive investment strategy?
In the latter case, passive investing entails a buy-and-hold strategy, such as index investing. The investor buys an index fund, sits on the investment over a long period, irrespective of short term volatility moves.
An active trading strategy entails trading on short term movements to achieve alpha returns, returns that exceed the index
The previous decade saw passive strategies outperform active trading strategies.
The post-financial crisis 2008 ushered in a period of unprecedented monetary easing by the world’s central banks. So with all that liquidity sloshing in the financial system stocks kept rising irrespective of the fundamentals and that made passive investing a winning strategy.
An active trading strategy could outperform a passive strategy when the central bank’s monetary easing policy becomes a less effective price manipulating tool
Put another way, when risk matters and price discovery drives price action, then active trading strategies are likely to outperform.
What are the active trading strategies?
Day trading, position trading, swing trading, and scalping are four popular active trading strategies.
Day trading is one of the best known active trading strategies. Day trading, as the name implies, entails buying and selling securities within the same day. Positions are closed out within the same day they are taken, and no position is held overnight.
Active trading strategies also include position trading
This uses long term charts, anywhere from daily to monthly and a combination with other methods to determine the trajectory of prices.
The position trader may hold his position for several days to several weeks and sometimes longer, depending on the trend. Trend traders are wave riders, they are looking for successive higher highs or lower highs to determine the trend of a security.
Trend traders are looking to benefit from both rising and falling prices in the market. So they are trying to determine the direction of the market, but they are not trying do not try to predict any price levels.
Another one of the above mentioned active trading strategies is swing trading
Swing traders aim to profit from a change in trends. At the late stage of a trend, there is typically some price volatility as the new trend tries to establish itself. Swing traders buy or sell as the price volatility sets in.
Swing traders work to a set of trading rules based on technical or fundamental analysis.
Scalping is one of the most rapid active trading strategies implemented by active traders
Scalping entails profiting from various price gaps, which are often caused by bid-ask spreads and order flows. So a scalp trader profits by making the spread or buying at the bid price and selling at the asking price to receive the difference between the two price points.
Paul Rotter, considered one of the best traders in the world, is a scalp trader, he is known as “the flipper” because of his unique trading style.
For a comprehensive understanding of active trading strategies visit the investment home study course.