What is 'Active Trading'

Active trading is the  buying and selling of securities with the intent of holding them for a short duration, usually no longer than one day. Active trading as an investment strategy seeks to take advantage of short-term price movements with a focus on highly liquid markets like stocks, currencies, options, and derivatives. Active trading is considered one of the most speculative trading strategies.

BREAKING DOWN 'Active Trading'

Active trading is the buying and selling of securities within days or weeks to capitalize on short-term price movements. In general, active traders use various forms of technical analysis to identify buy and sell signals, as well as set stop-loss and take-profit points.

[ Active traders use many different strategies to capitalize on opportunities, ranging from scalping small profits from intraday volatility to identifying swing trades over the longer term. Investopedia's Trading for Beginners Course provides new traders with a comprehensive introduction to the practice. You'll learn basic and advanced technical analysis, chart reading techniques, and all of the technical indicators that you need to succeed in over five hours of on-demand video, exercises, and interactive content. ]

Active trading shouldn’t be confused with active investing, which involves picking stocks for long-term portfolios based on fundamental analysis. In contrast, active traders focus exclusively on finding short-term trades using technical analysis.

The primary benefit of active trading is that it generates a consistent income with greater upside potential than long-term passive investing. In fact, most active traders use leverage to amplify their capital and enhance the earning potential of their positions. Traders may also specialize in specific assets, such as stock options or futures.

The primary drawback is that academic studies conducted by Terrance Odean and Brad Barber found a positive correlation between trading activity and negative returns. In other words, the researchers found that those trading more often tended to generate worse returns. High frequency trading has also made it difficult for active traders to compete in some markets.

Active Trading Strategies

Active traders use several different strategies to identify and capitalize on opportunities over the course of a single day to several weeks using technical analysis. These strategies may be implemented manually or automated using trading systems.

Popular active trading strategies include:

  • Day trading is the buying and selling of securities in the same day based on technical factors or simple supply and demand. For instance, a day trader may short sell – or fade – a stock following an earnings announcement run-up.
  • Swing trading takes advantage of short-term price swings that last several days as opposed to a single day. For example, a swing trader may predict that a stock is about to break out and decide to take a position a day or two beforehand.
  • Position trading looks at longer-term technical opportunities that may arise over the course of a week to several months. For example, a trader may see a long-term ascending triangle chart pattern with favorable underlying fundamentals and decide to take a position in the stock that may require a couple weeks to materialize.
  • Scalping is a fast-paced strategy that involves making hundreds of trades per day to take advantage of small price discrepancies. For example, scalpers may take advantage of ECN rebates to buy and sell for a marginal profit with each trade.

The Bottom Line

Active trading is the buying and selling securities within days or weeks to capitalize on short-term price movements. Active traders use many different strategies to generate buying and selling signals, including day trading, position trading, swing trading, and scalping. There are many benefits and drawbacks to active trading, but some academic research suggests that active traders face an uphill battle for returns.

RELATED TERMS
  1. Scalping

    Scalping is a trading strategy that attempts to make many profits ...
  2. Active Stocks

    Active stocks are heavily-traded stocks on an exchange, which ...
  3. Today's High

    Today's high refers to a security's intraday high trading price ...
  4. Forex Trading Strategy

    A forex trading strategy is a set of analyses that a forex day ...
  5. Pattern Day Trader

    An SEC designation for traders who trade the same security four ...
  6. Swing High

    Swing high is a term used in technical analysis that refers to ...
Related Articles
  1. Trading

    4 common active trading strategies

    Learn four of the most popular active trading strategies — and why active trading isn't limited to professional traders anymore.
  2. Trading

    Is Scalping Or Swing Trading Right For You?

    A look at how scalping strategy is different from a swing trading strategy.
  3. Investing

    The Daily Routine Of A Swing Trader

    From pre-market to after hours, see what you need to do to capture gains quickly.
  4. Trading

    Introduction to Options Types

    Options are often the bread and butter of day traders. Here are some of the more common types of options.
  5. Trading

    What Type Of Forex Trader Are You?

    Timing may be the key to uncovering your true strength as a forex trader.
  6. Trading

    Intro to Types of Trading: Technical Traders

    Explore in detail the technical trading approach, which looks to the past to predict the future.
  7. Trading

    Introduction to types of trading: Fundamental traders

    Fundamental trading is a method by which a trader focuses on company-specific events to determine which stocks to buy and when to buy them.
  8. Trading

    Day trading strategies for beginners

    This day trading tutorial covers general principles, deciding when to buy and sell, common day trading strategies and how to limit losses.
RELATED FAQS
  1. What Does It Mean When There Is 'Price Action'?

    Price action refers to the day-to-day fluctuation in the price of an asset. Read Answer >>
  2. Is there a buy-and-hold strategy in forex, or is the only way to make money by trading?

    Typically there are different ways to trade in most markets. Traders have been classified into three groups, primarily based ... Read Answer >>
  3. How do I start using technical analysis?

    Technical analysis is a method of analyzing securities by evaluating current and historical price and/or volume activity. ... Read Answer >>
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  3. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  4. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  5. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center