What is Active Trading?

Active trading is the purchase and sale of financial assets for fast profit based on short-term price movements. It’s usually done in a highly liquid market. Active traders commonly prefer to work with volatile stocks, forex, and derivatives.

They constantly analyze these markets, study trends, and look for patterns. Traders who actively participate in the market use many methods and strategies to achieve their trading goals. The meaning of active trading implies that traders should always be ready to make a trade. For this reason, active trading requires multiple sources of information to maximize potential opportunities.

Active Trading VS. Passive Trading

When people are trading passively, they are focused on long-term investment and asset growth. This type of trading involves carefully designed long-term strategies to reduce risk. Many people use this method of investing to boost their retirement since a well-diversified portfolio is more likely to generate consistent returns with exponential growth over a long period. Passive traders seek to reduce the number of trades, while keeping each trade open for weeks and months. To achieve this, they try to follow long-term trends. As a result, such traders and investors don’t monitor the charts often. Notice that passive traders are still affected by market risk and may react slower to the change in market environment.

Active traders, on the contrary, try to profit from short-term price fluctuations or market timing. Such traders require more time for market analysis and trading. They choose instruments that are cheaper to trade, i.e. have lower spreads. While active traders are exposed to various risks, they are flexible in making use of various trading opportunities. Moreover, active traders can quickly gain vast experience and knowledge about the market.

Active Trading Types

Traders use several methods in active trading. Each has its pros and cons. As an active trader, you can use one or a combination of the strategies below. However, deciding which type to choose, you need to study and consider all the risks and costs associated with each.

Day Trading

Basically, when people think of active trading, the first thing that comes to mind is Day Trading. This strategy involves buying and selling an asset within the same trading day to take advantage of small market changes. Those involved in this type of trading are usually professional traders who know exactly what assets to buy and when to sell them.

Scalp Trading

Scalp trading or scalping is the shortest-term style of active trading. It focuses on large position sizes to get the results of price differences that occur within a very short period, from a few seconds to a minute. In rare cases, it can last up to several hours. With this strategy, traders take advantage of the price gaps caused by the bid/ask price spread and order flows.

Swing Trading

Swing trading is a medium-term trading strategy used by traders who profit from price fluctuations. Swing traders identify a possible price trend and then hold a particular asset for a certain period to profit – from a minimum of one day to several weeks.

Position Trading

Position trading contrasts slightly with the other three types of active trading. It corresponds to the longest time interval. A trader keeps depending on the trend from several days to weeks or even years. Generally, position traders get into a trade after it has been established. As soon as the trend breaks, they exit the position. This type of trading involves large investment portfolios and is largely associated with passive investors.