We can classify trading stocks into two primary types. Both done with the ultimate goal of making a profit on your investments.
The user buys a set of shares and then waits for the price to peak before selling it back to the market. The difference in the costs will be the profit gain.
The rise and fall of the market occur for various reasons like new policies, official press releases from the company, or an overall surge in the market. Many global and national phenomenons can result in fluctuations. When the price is higher, the aim is to sell.
Types of Stock Trading.
Passive trading is where the user picks up stock from the market and holds on to them for a more extended time period. This purchase can be in the form of investment or in for a long term-profit gain. This form of trading is also called ‘buy-and-hold’ trading.
Passive tradings are the ideal way to build a bank for your investments. However, It will require a deep understanding of the business and only bears fruits with large capitals. Passive trading cannot give you a fixed income each day.
The other type of trade that we will be focusing on further is active trade. In this case, the users buy stocks intending to sell them in a short time. This sale can be within the day, or at the opening of the next day’s market, these are trend-driven trades done to drive immediate profits.
Best Active Trading Strategies
There are mainly four types of strategies for active trading. These depend on the holding time, the investment, and the method of trading. There is no such thing as the perfect strategy; the trader can pick a trade-type based on their comfort.
Let’s take a look at each one of them:
1. Day Trading
Day trading is one of the most widely used forms of active trading. It is a method of buying and selling securities or stocks on the same day. The markets have a fixed open and close time within which the trade must be closed.
Day trading aims to detect shares on the upward and buy them at the start of the trade-day, as the day progresses and the stock-price climbs. When the value of the stock reaches the desired value, it’s sold to make a profit.
What is a day trader supposed to do when there is no gain? Well, they are sold back to the market at a fixed stop-loss value. The stop loss is a point where you sell the stock to limit the damages.
The idea behind day-trading is not holding stocks overnight and to square the account before market-close-time. All professional traders widely use day trading.
Market makers also use day-trading. They are the mediators between the trader and the market. Learn more about day trader on Alpaca’s this post.
2. Swing Trading
Swing-trading is the high-risk but high pay-out trading method. Swing-trading is done when there is a higher level of uncertainty in the market, and the exact fluctuation of the stock cannot be determined.
While the swing trade can last a couple of weeks or a couple of months — it is still an active trade. This form needs the user to keep a constant eye on the stock price. The stocks are purchased based on the anticipation of rising, not entirely determined by the overall market.
The advantage of this kind of trade is that they are incredibly short-term. This means that profits bank faster throughout the day. If there is any sense of risk, the shares can also be sold to limit losses.
3. Scalping Trading
This is a method to trade stocks that is ideal for low-risk active traders. The main aim of scalping is to make a profit from minimal price changes. In this technique, the trader does not wait for a massive spike in the price — they set small and realistic exit-points for each stock. They then execute multiple such trades for better profits.
The advantage of scalping is that the results are faster and could come in a few minutes. The disadvantage is that they make minimal profits. The users will have to execute more number of traders each day to make the same amount as a day-trader.
When we say a small window of time, we mean time as short as one minute to twelve minutes. Scalping implies that the trader picks one stock and plays the market for a maxim of this time. After this time, if there is no spike or downward movement, they are sold and move on to the next stock.
4. Position Trading
Position trading, in its basic definition, is not a form of active trading. Position trading is the study of stock movement for weeks and months to determine it’s trends. However, some advanced traders use position trading as a way of active trading.
For example, if the user holds X number of stocks for a few months. From the purchase time to the present day, the user has seen the stock price rise consistently. At this time, the user does not sell the stocks but adds a few more to the bulk at the current market price.
As the stock’s cost goes up regularly, they eventually sell the whole bunk and make varied profits based on the purchase costs. In such a way, position trading can become an active trading method.
Active trading is one of the most effective ways to make money from the stock market. These strategies have been used by individuals across the globe to build a sustainable income from the stock market. It is about picking the right approach for you.
Another crucial factor is the trading platform. The right broker will provide you the perfect balance to make fast electronic trades. The most significant advantage to active tradings that the user can make a constant income with even a small capital.
Learning to read trends comes with practice, so take your time, invest small, and grow gradually.