Short-term technical analysis is the study of short-term price trends and movements to profit from them. You base an active trading strategy on a different mentality than the long-term, buy-and-hold investing approach utilized by passive or indexed investors. Most traders believe the most significant profits are found in short-term price changes and following the market trend.
There are various ways to create an active trading strategy, each with its own set of market conditions and associated risks. You can check here for the most popular active trading strategies, as well as their built-in expenses. We’ll take a quick look at these.
The most well-known active trading technique is day trading, which has become rather popular in recent years—also known as active trading. Day trading, named after the time frame you trade, is a strategy for buying and selling stocks within a single day. Positions are closed out within a single day of being taken, and you don’t keep any positions overnight.
Traditionally, skilled traders such as specialists or market makers have done day trading. Electronic trading has made this an option for novices.
Some people think of position trading as buy-and-hold investing rather than active trading. When done by an expert trader, position trading can be considered a form of active trading. Longer-term charts, such as daily or monthly, are combined with other techniques to determine the market’s current trend direction in spot trading. Depending on the market’s momentum, this sort of trade may continue for many days to several weeks or longer.
Identify the trend of a security by looking for higher and lower highs that follow consecutively. Trend traders jump on and ride the “wave” to profit from both up and downswings in the market—traders who follow the trend look for market direction but do not attempt to predict price levels.
Traders who follow trends typically take positions after the movement has become established, and when the trend changes direction, they generally exit their position. When trading markets with extreme swings, trend trading gets more complex, and it frequently reduces positions.
When a trend has broken swing, traders enter the market. When the trend is over, there will usually be some price fluctuation as the new trend takes hold. Swing traders are those who take positions when the price volatility starts to rise. Traders generally hold swing trades for more than a day but a shorter period than trend trades. Swing traders use technical or fundamental analysis to develop a set of trading rules.
A swing trader’s primary objective is to buy and sell securities at the optimum moment.
Active traders use scalping as one of their primary strategies. Essentially, it means identifying and taking advantage of bid-ask spreads that are a little wider or narrower than usual owing to short-term imbalances in supply and demand.
A scalper does not try to take advantage of big swings or conduct high volumes of trade. On the contrary, they aim to take advantage of tiny changes that frequently happen, using moderate transaction volumes. Because the margin per trade is low, scalpers seek liquid markets to increase the number of their trades. Scalpers and swing traders don’t want to trade in active, fast-paced markets prone to sudden price changes.
Costs that go with trading strategies
There’s a reason why professional traders used to trade only active methods. Not only does having an in-house brokerage firm minimize expenses due to high-frequency trading, but it also improves trade execution. Two components that will enhance the strategies’ profit potential are lower fees and better performance.
It may be difficult, if not impossible, to implement such techniques without significant hardware and software investments. In addition to real-time market information, these costs make active trading rather tricky for the individual trader, but it is by no means impossible.
The bottom line
Traders who maintain a consistent and disciplined approach to trading can use one or many of these methods. However, before deciding whether or not to utilize these tactics, you should weigh the potential drawbacks and expenses.