If you have an interest in the stock market or have been exploring investment strategies, you may have come across a few stock market jargons. One such term is "active trading"; don’t confuse it for a similarly sounding term called “active investing”. In this article we will learn what active trading is and cover its various forms.
In a nutshell, active trading is a popular strategy used by traders in the share market to generate profits by actively buying and selling securities within short time frames.
What is Active Trading?
Active trading is a trading strategy where the trader's objective is to take advantage and profit off the short-term price movements in various financial assets—stocks, bonds, currencies, or commodities, using an online trading app. In other words, this strategy aims to buy and sell securities within short time frames to make profits.
If this rings a bell and makes you think of other terms like intraday or swing trading? If the answer is yes, you’re on the right track. This strategy is like the umbrella term that encompasses several short-term trading strategies. Active traders constantly monitor the market, and due to shorter holding periods, they generally rely on technical analysis to make their trades; they might also place several orders within the day.
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Types of Active Trading?
As implied above, active trading—which is more like an umbrella term—encompasses other strategies like intraday trading, swing trading, and scalping.
1. Intraday Trading: When most traders think of active trading, they think of intraday trading. Intraday trading, or day trading, is a type of active trading where traders open and close positions within the same trading day—aiming to profit from short-term fluctuations. For instance, they buy a stock of a company at 10:00 AM and then sell it at 12:00 PM on the same day. They sell it before the market closes, regardless of whether they are yielding a profit or a loss.
2. Swing Trading: While some may think otherwise, the consensus accepts swing trading as another form of active trading. They look to profit from short-to-medium-term price movements. So, unlike intraday traders, swing traders tend to hold their positions for a few days to potentially even several weeks. Therefore, a swing trader does not place multiple trades on a single day, or even place one trade every day, but they still trade frequently enough.
3. Scalping: Lastly, we have scalping: an ultra-short-term active trading strategy where traders aim to profit from small price changes within seconds. Scalpers execute multiple trades throughout the day, targeting small profits on each trade. Scalping is considered one of the most aggressive and high-risk active trading techniques, as it involves multiple factors that traders must pay attention to those techniques.
Active Trading Order Types
Even with a close watch on the stock market, you could overlook important possibilities because of other distractions or while executing other deals. You can purchase and sell without constantly monitoring prices by using the following order types:
Stop order enables you to seize an opportunity. For example, if you purchased stocks for Rs. 100, you would anticipate that the price will rise to Rs. 108. To sell the shares at current price, you might put in a sell-stop order at Rs. 108.10.
You can restrict losses by using a stop loss. You may, for instance, sell the shares for more than Rs. 108. You won't, however, keep or sell shares for less than Rs. 96. In this case, you might place a stop loss at Rs. 96.
During sudden declines and increases, a limit order might assist you seize a beneficial price. For example, you want to check whether you can purchase for Rs.97.50 during a brief price reduction, even if the costs could be at Rs. 108. You might put in a limit buy order at Rs. 107.50 in this situation. Similarly, if the price hits Rs. 110, you can put a limit sell order.
Should You Start Active Trading?
Since active trading has its different components—intraday trading, swing trading, and scalping—it is essential to evaluate each of the three techniques individually. That is because all the three approaches of active trading significantly differ from each other; one approach might suit you but the other might not. For example, you may find swing trading a suitable strategy, but scalping or day trading might not be your cup of tea.
That said, all three active trading strategies have some similarities and demand the following prerequisites; the degree to which each strategy demands them vary. All three active trading strategies are considered as dynamic and fast-paced strategies.
So, active traders frequently—if not constantly—track and monitor the markets. Therefore, active prerequisites you to dedicate time monitoring the markets. They have consistently dealt with market volatility, so must have flexible strategies in their books, but simultaneously maintain trading discipline. At the same time, they implement technical analysis and indicators to govern their trades.
Active Trading vs Passive Trading
Lastly, ensure that you get mixed up between active trading and passive investing. You know what active trading is: short term trading strategies that encourage frequent buying and selling of securities, aiming to profit from short-term price movements. They rely on technical analysis to do so.
On the other hand, passive investing involves actively managing an investment portfolio—investing in the right stocks or assets—by analysing fundamental data, financial statements, economic trends, and other factors. Active investors carefully pick stocks to outperform the market. Therefore, passive investing requires thorough research and analysis and often involves holding positions for more extended periods compared to active trading.
Active trading allows individuals to benefit in the financial markets by capitalising on short-term price fluctuations. It is a dynamic strategy that necessitates market knowledge, technical analytical abilities, and discipline. However, it is vital to recognise that active trading carries higher risks owing to its short-term nature and necessitates continual market monitoring. If you are thinking about getting into active trading, you must first comprehend market dynamics, risk management approaches, and trading tactics.
What is Active Trading FAQs
Day trading and active trading are not the same thing. While active trading encompasses a variety of methods aimed at short-term gains that are not limited to a single day, day trading entails buying and selling assets inside the same trading day.
Buying and selling stocks often with the goal of outperforming the market is known as an active trading strategy. Techniques include using technical analysis, swing trading, and momentum trading.
Depending on personal objectives, either active or passive investment is preferable. Active investing is trading more often in an effort to outperform the market, whereas passive investing is taking a long-term, low-cost approach—often through index funds—in an effort to equal market returns.
Yes, beginners can try their hand at swing trading or even intraday trading, if and only if they have done their homework and are aware of the risks of these strategies.
Market volatility due to new events, financial results, and negative prevailing market sentiments, emotional decision-making, and improper strategies are all risks associated with active trading.
Active trading mandates regular monitoring and quick decision-making, which can be difficult to balance with a full-time job. Balancing both can be challenging, so before engaging in active trading, consider your schedule and responsibilities.
You can use technical indicators, like moving averages, momentum oscillators, RSI, and bollinger bands for active trading.
Clear investing goals, a trading plan, self-control, remaining current with market news and trends, and risk management techniques are some suggestions for effective active trading in the Indian stock market.