Trading Tutorial – Active Trading vs. Day Trading
Trading in financial markets involves so many trading methods. If you have just entered the trading world, you might ask what active and day trading are and if there are any differences.
In this piece of writing, we focus on active trading vs. day trading aspects, explaining the nuances between these two trading strategies. Let’s get all the essential information about it, shall we?
Active trading vs. day trading – Active Trading definition
Active trading is buying and selling stocks or other securities for a quick profit. It’s based on short-term price movements. The aim is to hold the trading position for a short period. There’s no precise time measurement when it comes to active trading.
Day traders making tens or hundreds of trades per day are very actively trading. Also, swing traders who open or close positions every couple of days are active traders.
Active traders focus on high liquidity markets such as stocks, Forex, futures, and options. They typically use high volumes of trades to make a profit because the price swings tend to be relatively small over a short period. Active traders also use a variety of trading order types.
One of the most common trading orders is a stop order. For instance, if there’s resistance at 50 USD, they may set a buy stop at 50.05USD. It sends an order to buy id the price reaches 50.05 USD
A stop-loss order helps keep losses manageable if the price goes against the trader.
To execute trades efficiently, active traders often employ limit orders, which allow them to specify desired buy and sell prices.
For instance, if a stock is trading at $50, a trader could place a limit buy order at $49.50 to capture a potential drop or a limit sell order at $51 to exit the position at a desired profit level.
These orders streamline trading by eliminating the need to constantly monitor prices. Active traders focus on short-term trading, prioritizing technical and statistical analysis over fundamental or economic factors.
Their trading approach is characterized as a form of active trading, emphasizing price action and technical indicators for decision-making.
Active Trading Strategies
We can group active traders within three categories. Each category tends to trade on different time frames and amounts, even though they represent all short-term traders.
Day trading
Day trading success hinges on swift decision-making and adept market analysis. Day trading and swing trading involve rapidly buying and selling securities within short timeframes to capitalize on small price movements.
While day traders focus on executing trades within a single day, swing traders extend their horizon over a few days or weeks to catch favorable market swings. Both strategies demand meticulous attention to market dynamics and technical indicators.
Effective day trading requires proficiency in interpreting one to fifteen-minute charts, enabling traders to seize fleeting opportunities and optimize their trading outcomes.
Scalping
If the right decisions are made for immediate profitability, scalping is the best option. It is about carrying out ultra-fast financial transactions in a few seconds, which requires unfailing concentration and instantaneous decision-making.
Swing trading
Swing trading requires a reaction time of a few hours for purchases that will be kept for a few days or several weeks before being resold.
The following options are quite similar, except that the acquired financial assets are not retained. They are often resold during the same session, sometimes with a reaction time that does not exceed 30 minutes.
Position Trading
Position trading, often mistaken for a passive buy-and-hold approach, actually involves active engagement in the market.
Position traders analyze longer-term charts spanning from daily to monthly intervals, alongside other indicators, to discern prevailing market trends.
Unlike trend traders who capitalize on established market directions without predicting specific price levels, position traders hold their positions for several days to weeks, or even longer, aiming to benefit from sustained market movements.
However, in periods of heightened volatility, navigating position trading becomes more challenging, prompting traders to exercise caution and often reduce their exposure to mitigate risks.
Active trading vs. day trading – What is day trading?
Highly popular among full-time traders in the United States, Day Trading is attracting an increasing number of followers for its aggressive investment approach.
Day Traders aim to capitalize on intraday fluctuations, closing all positions before the market closes to maintain a liquid portfolio. Employing strong leverage and frequent trading, they target small capital gains, typically ranging from 0.5% to a few percent per transaction.
Some traders execute dozens of orders daily, prioritizing more winning trades while minimizing losses, often closing positions at market close. It’s crucial for day traders to swiftly cut losses, aiming to keep them as minimal as possible.
This overview covers essential day trading principles and considerations before diving into this dynamic technique, including the importance of fundamental analysis and the execution of multiple trades.
How much capital to start with?
The minimum sum to practice day trading is not so significant. Unlike traditional stocks investment, you will use the leverage effect (on shares or futures), which increases your financial possibilities and focuses only on a few lines. It is not uncommon for the day trader to be positioned in only one stock at a time with high leverage.
Consequently, even a modest budget may suffice. It will be enough that the brokerage fees do not amputate your small percentages of gain too much.
Markets for day trading
To engage in day trading effectively, two critical conditions must be met: substantial liquidity and market volatility. Liquidity denotes the volume of daily exchanges on securities, ensuring swift entry and exit from positions.
Major U.S. indices like the Dow Jones and Nasdaq boast high liquidity, ideal for equity day trading. Futures markets also provide ample liquidity and significant leverage, offering diverse trading opportunities online.
Additionally, considerable market volatility is essential for day trading success, presenting opportunities for profit within a short period of time. Before diving in, it’s crucial for traders to assess their risk tolerance against market fluctuations.
Day trading: a profitable practice?
By its approach, day trading is highly speculative, so gains are uncertain. Some traders manage to do well, but it is a risky strategy that requires certain know-how, a good understanding of the financial markets, and appropriate risk management.
Day trading takes advantage of price volatility leading to bullish or bearish movements in the short term; however, long-term investing is a practice of investing in creating business value.
Therefore, the success rate is higher with investment than with day trading compared to the risks involved.
Additionally, some financial experts explain that passive trading strategies perform better over long periods than active ones, especially when accounting costs are considered.
Day trading strategies
Day trading enthusiasts generally implement several strategies. Here are the main ones.
News trading
News trading occurs when a trader enters and exits the market before or after releasing an important economic statistic for the markets by exploiting volatility to the maximum.
Among the ‘market movers’ having the most impact on the markets, we find the figures for inflation, employment, and growth because they will influence central banks’ decisions concerning their monetary policies.
Range trading
Range trading allows day traders to take advantage of price movements between highs (supports) and lows (resistances) during a sideways trend where neither buyers nor sellers have control of the market.
Breakout Trading
Trading breakouts allow you to take advantage of price acceleration when an asset crosses or breaks a key price level.
To optimize your results, you need to ensure that certain market patterns exist, such as consolidation before a breakout and an increase in trading volume at price acceleration, indicating investors’ willingness to support prices as far as possible.
Technical analysis
Technical analysis is at the heart of the majority of day trading strategies. It is based on analyzing price action and using technical indicators to try to spot key price areas, moments of acceleration prices, reversal or pull-back conditions or confirmation, and reversal or indecision chart patterns.
Which products to use for day trading?
In order to achieve results using day trading, it is important to use derivatives such as CFDs (contracts for difference), options (call options and put options), or futures (futures contracts) which are based on the leverage to magnify price fluctuations.
However, such a trading technique is risky if the market moves against you. Therefore, it is important to have good risk and money management, especially with stop-loss orders, to better preserve your trading capital.
Bottom line
Understanding the differences between active and day trading is crucial for newcomers in the trading world. Active trading involves frequent buying and selling for short-term profits, with no specific holding period.
Day trading, a subset of active trading, focuses on executing trades within a single day to capitalize on intraday price movements. Both strategies prioritize technical analysis over fundamental factors, emphasizing swift decision-making and risk management.
