Posted in Finance, Accounting and Economics Terms, Total Reads: 385
Definition: Active Trading
Active trading is buying and selling of financial instruments for a relatively shorter duration. Generally the trader trades within the day. They are more speculative in nature and depend on intra-day fluctuation in prices of the securities. With the advent of internet faster buying and selling is possible and the number of transaction has also increased drastically.
Financial instruments like stocks, options and derivatives are most frequently transacted. Online transaction helps the investor to constantly monitor the movements in prices and quickly act on them to garner profitable returns. The numbers of tools for analyzing the securities have proliferated making it easier to take prompt decision. However the trader has to optimize the profit keeping in mind the transaction cost associated with frequent buying and selling.
One of the features of active trading is that it is more of speculative and anticipatory in nature. The fact that prices reflect the true value of shares over a longer period and in the short term, market tends to correct the prices. This leads to quick movements in stock prices. Thus rather than in depth analysis, one has to frequently monitor the stocks and check for patterns, price momentums, moving average and other such heuristics.
Some of the techniques used are:
Trend following: the trader takes decision basing on the past movement in share prices. The rising stock will rise and the falling stock will further fall.
Contrarian investing: here the trader reverses the stand and expects the share prices to fall if it has been rising in the past.
Range trading: In this instance the trader focuses on the highs and lows in the share prices in the past.
News trading: the trader actively looks out for any favourable or unfavourable announcements made by the company and takes decision.
Other techniques include scalping, rebate trading, candlestick charts are also used.