Active trading implies to the act of buying and selling securities on the basis of short-term movements. This is done with the aim of making a fast profit. As per Kavan Choksi, the system of active trading is in contrast to passive investing where the approach is to purchase and hold over the long term. In the case of active trading, traders typically use a variety of tools and strategies, like fundamental, quantitative and technical analysis, in order to make the right decisions. They may also focus on market news and events.
Kavan Choksi marks a few common active trading strategies
Active traders can trade diverse types of financial instruments, starting from stocks and bonds to currencies and commodities. These traders might even use options, futures and derivatives in order to hedge their positions or increase potential returns. Here are some of the most common active trading strategies followed by modern traders:
- Scalping: Scalping involves profiting from tiny price movements in a security. Scalpers usually hold a trading position for quite a short span of time. This time period can range from a few seconds to a couple of minutes. Their goal is to generate gains from small price fluctuations. Traders making use of the scalping approach take transaction fees and bid-ask spreads into account. Owing to the frequency of the trades made by the scalper, such expenses can be quite high if not managed in an efficient manner. Scalping involves swift decision making, discipline and focus. After all, scalpers have to enter and exit positions fast enough to take advantage of small price movements.
- Swing trading: Swing trading involves buying and holding securities for a short period of time, typically for a few days to a few months. The goal of such a trading style is to gain from short term price movements in the market. Securities are purchased when prices are low and sold off when prices are high. Swing traders may also have to manage sudden and unexpected moves in the market which can lead to losses. These traders try to stay informed about market trends and news, and require good strong risk management skills and discipline to stick to their trading plan, and avoid making any kind of emotional trading decision.
- Day trading: This is a short-term trading strategy where securities are purchased and sold within the same trading day. Day traders ideally try to profit from price movements in a security, and tend to close all of their positions by the end of the market trading day. Most people believe that individual investors who work from home are the only ones to take part in day trading. However, in reality, day traders also work for a variety of large financial institutions like hedge funds, brokerage firms and banks.
Kavan Choksi underlines that active trading provides a number of benefits to individuals who are looking to actively participate in financial markets. This trading approach has the potential for higher returns in comparison to traditional long-term investing. By actively monitoring the markets and taking advantage of short-term price movements, active traders can capitalize on a variety of valuable opportunities to generate profits.
