The purchasing and selling of stocks for fast profit according to a short-term change in price.
How Active Trading Works
In active trading, the trader doesn't plan on holding onto a stock for long. Their motive is to sell immediately for a small increase in price within a short period. Most people who participate in active trading are day traders. They are constantly studying the market, buying when the price is low, and selling immediately it raises. Typically, day traders concentrate on buying foreign currencies, stocks, and options that have a wider value.
Because the price changes that occur quickly are quite small, these active traders only make huge profits by selling a large volume of stocks. Traders can use a tool called the buy-stop order, which will send a command to buy once a stock price increases.
There's also the stop order tool, which is important because it reduces loss, especially if the price goes in the opposite direction. If the current market price is at $20 and you want to buy it at $19.50, you can limit the buy order to immediately after the price falls. The stop-buy order and limit buy order help the trader buy and sell successfully without actively studying the prices to see if they will fall or increase.
Example of Active Trading
Traders who participate in active trading use a wide range of strategies to accurately predict the stock market and make a profit. During the trade, if the price is against the trader, the trader leaves the trade with a loss. However, the trader can leave the trade with a profit if the price moves in the right direction.
Suppose Seven trades happened in the last 3 hours, and 14 transactions were made during the trades. At the end of the trade, the first, second, sixth, and seventh trades were won. However, the second trade was lost while little profit and little loss were experienced in the fourth and fifth trades respectively.
You should understand that every active trader aims to win more than they lose. This needs to happen to balance the cost basis. These costs arise from commissions and other fees incurred during active trading.
Types of Active Trading Strategies
In day trading, stocks are bought and sold within a single trading day. This is done to not miss the opportunity of profiting greatly from a stock that is believed to have an increase in value shortly. In this case, traders must actively study updates in the financial sector to detect if an event will influence the price of a stock.
A lot of active trading falls under this category. If the price of a stock is expected to increase, these stocks are purchased in bulk with the hope of selling it immediately there is a little increase in price. Once there is a little increase in price, these stocks are sold, which results in a lot of profit for the trader. This type of active trading is referred to as scalping.
In this type of active trading, the trader holds the stock for weeks without selling it. That is because the trader is waiting for an opportunity where an increase in the stock price will occur. The price may increase within hours, days, or even weeks.
Active Trading vs. Active Investing
Even though active trading and active investing seem to be fairly similar, they're quite different. Active investing refers to investors' number of investments to grow or rearrange their collection of stocks. Another difference between active trading and active investing is that active trading is only for the short term. In active investing, an investor could hold onto a stock for several years without selling.