As the name suggests, active trading involves trading actively on a regular basis. The active trader’s goal is to benefit from short-term price movements. The trader makes informed predictions on short-term and very short-term stock price fluctuations and then trades on the basis of such predictions with the goal of taking home a profit.
What is active trading: Definition and characteristics of active trading
The stock price predictions that active traders make are most often news-based, and active traders typically trade in rather large volumes. They use large volumes so that the small price changes have the potential to deliver sizable returns thanks to the multiplier effect.
Active traders may conduct several trades a day to a few trades every couple of days.
The defining factor of an active trader is his or her focus and level of being clued in. The essence and meaning of active trading having a finger on the stock market’s pulse. They will typically keep abreast with all news that has the potential to affect stock prices (and that does not mean celebrity sons or the MET a gala but announcements related to global policy, industry, oil prices, politics, trade, shortages and surpluses etc).
Active traders hone their skills by first trial and error and then by regular practice. Like magicians, they will always have tricks up their sleeves – they know how to use technical analysis and technical indicators, as well as Instagram influencers, know how to strike a pose. They spend a lot of time perfecting a whole gamut of strategies and methods and they are able to spot trends, that – for them – act as beacons of stock price reversals and other stock price behaviour.
They will also often have tools and technology at their disposal to help them make more accurate predictions and therefore increase their chances of earning.
Types of active trading
- Day trading
This is the most commonly pictured trader in movies and rags-to-riches (and also riches-to-rags) folklore. In fact, before you began upping your stock market awareness, perhaps this is whom you pictured when you thought of a trader. A day trader makes daily earnings (or losses, if his predictions do not pan out) by buying and selling all his shares in a single day. A day trader does not hold shares overnight. Any positions still held are sold by the trader’s stockbroker at the day’s closing price.
Day traders are looking for big events that might impact a share price. An acquisition, for instance, might drive up the share price of a company. Likewise, the annual budget might affect the share prices of all companies in a sector that benefits from it.
These traders will typically use 15-minute charts, 5-minute charts, and 1-minute charts to conduct their technical analysis and make informed predictions.
- Swing trading
These traders are looking to derive benefit amidst the volatile periods that precede a firm trend reversal. These traders usually hold on to their shares for a couple of days to a couple of weeks, however long it takes for a firm trend to finally materialise.
A swing trader is most likely waiting for a price breakout to confirm to him that his prediction about price trend reversal is indeed panning out as expected.
Swing traders typically conduct technical analysis using day charts, four-hour charts, and hourly charts. These traders might also use algorithms to make the right predictions and trades.
This type of trading requires superb tech at its disposal because it involves maximising pricing inefficiencies or discrepancies between different markets and stock exchanges. Huge volumes and extremely short term (and therefore the very quick placement of trades – or very quick buying and selling) are absolutely essential to this genre of active trading. As such, automation and heavy use of technology are essential if one is to maintain a sufficient edge in this type of trading.
Tick charts and one-minute charts are used in the technical analysis for scalping.
You might compare the day trader to Pinky who shops nearly every weekend; the swing trader to Deepali, who shops only when she finds herself behind the current fashion trends and the scalper to Riya who shops when there is a sale.
Popular active trading moves
Even though active traders watch the stock market like hawks, they are only human and might miss out on beneficial price movements while actioning another buy or sell or for numerous reasons why their attention might be called away from the screen momentarily. Alternatively, they might just not move quick enough. That’s why even active traders partner up with technology.
Stop order – used to capture the trade upon breakout. A trader holding shares he bought for Rs 800 might predict that the stock price is going to cross Rs 808 and place a sell stop order at Rs 808.10 so that he gets to sell his shares at that price.
Stop-loss – used to limit losses. The same trader might be targeting a selling price of a little more than Rs 808 but is not okay with holding/selling shares if the price drops below Rs 796. He will set a stop loss at Rs 796 and if the stock price drops that much, his stockbroker will sell his shares.
Limit order – used to capitalise on quick dips and rises. The same trader might be observing prices at Rs 808 but expects that the stock price could rise to Rs 810, most likely only momentarily. He will place a sell limit order at Rs 810 that sells off his stick if the price reaches that level, even if it is so momentary that he barely gets to notice it before the price falls down again.
Active trading is a good idea if you have plenty of free time and disposable income in hand. You’ll be your own boss! However, always remember that risk is a constant in the stock market and that traders should have a stable income before putting their savings at risk.