What Is Tactical Trading?
Tactical trading (or tactical asset allocation) is a style of investing for the relatively short term based on anticipated market trends or relatively short-lived changes in outlook based on fundamental or technical analysis. Tactical trading involves taking long or short positions in a range of markets, from equities and fixed income to commodities and currencies.
Diversified long-term portfolios will often include a tactical trading overlay, which involves allocating part of the portfolio to short-term and medium-term trades, in order to boost overall portfolio returns.
Tactical asset allocation can be contrasted with longer-term strategic asset allocation.
- Tactical trading involves short-term investment decisions based on anticipated near-term price movements in a security or market sector.
- Tactical trading may involve long or short bets in a wide range of markets and asset classes, as opportunities arise.
- Tactical trading is generally more complex and may involve higher risks than standard long-term (strategic) trading strategies, and often requires far more attention and analysis.
- Often tactical trading is layered on top of a broader strategic asset allocation.
How Tactical Trading Works
Tactical trading is an active management style where the focus may generally be on trends or technical indicators rather than long-term fundamental analysis. Usually, technical analysis is more of an important consideration in tactical trading strategies as it can be helpful in following price trends and determining optimal entry and exit points.
Tactical traders may seek to exploit short-lived market anomalies or more responsibly follow their investments in an active strategy that takes into consideration significant changes in the investing environment. Whatever the purpose, because of the more short-term nature of tactical trading, these types of investors will typically choose to use both technical and fundamental analysis in their investing decisions.
Tactical Trading Considerations
Tactical traders typically seek to deploy more active trading strategies than just buy and hold. This type of trading can be important when investing in cyclical investments that may substantially fluctuate in different investing environments. It is also used by investors who seek to identify short to intermediate profit opportunities that occur across markets as new developments occur.
Tactical trading is generally more complex and may involve higher risks than standard long-term trading strategies. Tactical trading can also have tax implications that require the investor to expand their due diligence analysis to integrate capital gains taxes.
Tactical traders may follow developments in a company that influences its immediate bottom line such as sales, revenue, and earnings. When seeking to time an investment in order to take advantage of how developments are affecting the stock price, the investor may also use the technical charts. Technical charts can show a wide variety of patterns, channels, trends, and price ranges that can be used at the investor’s discretion to identify profitable entry and exit points.
Overall, tactical traders will typically use a broader range of resources in their investing decisions to identify both short and intermediate profit opportunities. They may also take both short and long positions depending on their view of how market developments are affecting potential investments.
Tactical Trading Opportunities and Strategies
Across the global markets, there are several fundamental economic catalysts that are known to have specific effects on security prices. Sovereign interest rate policies are one of the most common catalysts for market changes globally. Governments adjust interbank borrowing rates to help support credit borrowing for government agencies, private sector companies, and individuals. When these rates rise it makes the issuance of new fixed-income investments more attractive for investors. When these rates fall they can allow companies to lower their cost of capital which can improve their bottom line earnings. Following federal interest rates and interest rate trends can be one important development that tactical traders analyze to ensure their portfolios are appropriately aligned with the current investing environment.
Many other broad market catalysts also exist such as trends in labor market conditions, revised international tariffs, global negotiations over oil production, varying levels of metal commodities production, and varying levels of agricultural commodities production.
To institutionally manage the many variables affecting market environments, global macro investing strategies are used. Macro and global macro investing strategies are the most comprehensive types of tactical trading strategies. These strategies are used by hedge funds and are also available through publicly traded managed fund strategies as well. Macro strategies seek to manage a portfolio with the goal of identifying and profiting from tactical investing around macroeconomic changes that the investment manager expects to affect certain investments in a positive or negative way. Macro strategies can use both short and long positions to profit from all types of changes occurring in the investing market.
Example: Smart Beta
Smart beta investing is a tactical trading strategy that combines the benefits of passive investing and the advantages of active investing strategies. Smart beta uses alternative index construction rules to traditional market capitalization-based indices, often utilizing a tilt toward specific industry sectors, to value vs. growth (or vice-versa), or to specific market capitalizations.
There is no single approach to developing a smart beta investment strategy, as the goals for investors can be different based on their needs, though some managers are prescriptive in identifying smart beta ideas that are value-creating and economically intuitive. Equity smart beta seeks to address inefficiencies created by market-capitalization-weighted benchmarks. Funds may take a thematic approach to manage this risk by focusing on mispricing created by investors seeking short-term gains, for example.