Active traders buy and sell securities based on short-term movements capturing the market trend where the profits are made. There are several methods that can be used to accomplish an active-trading strategy as follows:
Position trading makes use of longer term charts say from daily to monthly in combination with other methods to determine the trend of the current market direction. This type of trade may last for several days to several weeks and even longer depending on the trend. Typically, trend traders will jump on the trend after it is established, and then exit the position when it breaks.
This is the most well-known active-trading style. As the name implies, this is the buying and selling of securities within the same day. Positions are closed out within the same day they are taken, and no position is held overnight. In most cases, day trading is done by professional traders however electronic trading has opened up the practice to any trader.
This is one of the quickest active trading strategies. It includes exploiting various price gaps caused by bid/ask spreads and order flows. Scalpers attempt to hold their positions for a short period, thus decreasing the risk associated with the strategy. A scalper try as much as possible to take advantage of small moves that occur frequently and since the level of profits per trader is small, they try to look for more liquid markets to increase the frequency of their trades. Scalpers, also prefer markets that aren’t prone to sudden swings to enable them make spread repeatedly on the same bid/ask prices.
Swing traders buy or sell as price volatility sets in. Swing trades are usually held for more than a day but for shorter term than trend trades. Swing traders usually set trading rules base on Fundamental or Technical analysis. These trading rules or algorithms are designed to identify when to buy and sell a security. Join our Newsletter List
There are risks and costs that are associated with each of the aforementioned strategies hence the need to have full information before deciding which one is the best to use.
To be successful in trading, one needs to understand the importance of and adhere to a set of rules that have guided all types of traders, with a variety of trading account sizes. Each rule alone is important but when they work together the effects are strong. Trading with these rules can greatly increase the odds of succeeding in the Markets. We are going to look at each of the rules in details as follows:
- Risk only what you can afford to lose – One must be prepared to lose all the money allocated to a trading account. Therefore it is important not to allocate money meant for other obligations like Children’s college or paying mortgage to a trading account.
- Always use a Trading Plan – A trading plan is a written set of rules that specifies a trader’s entry, exit and money management criteria. Using a trading plan allows traders to do this even though it is time-consuming. You can test a trading idea before you risk real money. Backtesting applies trading ideas to historical data allowing traders to determine if a trading plan is viable, and also shows the expectancy of the plan’s logic. Once a plan has been developed and backtesting shows good results, the plan can be used in real trading. The key is to stick to the plan. Taking trades outside of the trading plan, even if they turn out to be winners, is considered poor trading and destroys any expectancy the plan may have had.
- Treat Trading like a Business – To be successful, one must approach trading as a full or part-time business not as hobby or as a job. As a hobby where there is no real commitment to learning, trading can be expensive. As a job it can be frustrating since there is no regular paycheck. Trading is a business and incurs expenses, losses, taxes, uncertainty, stress and risk. As a trader, you are essentially a small business owner and must do your research and strategize to maximize your business’s potential.
- Protect your Trading capital – This means that you should not take any unnecessary risks and doing everything you can to preserve your trading business but note that losing trades is part of business.
- Become a student of the Markets – Learning should be a continuous process. Traders need to remain focused on learning more each day. Understanding the markets and all of their intricacies is an ongoing, lifelong process.
- Use Technology to your advantage – Charting platforms allow traders an infinite variety of methods for viewing and analyzing the markets. Backtesting an idea on historical data prior to risking any cash can save a trading account, not to mention the stress & frustration. Getting market updates with smartphones allows us to monitor trades virtually anywhere. High speed internet connections can also increase trading performance.
- Develop a Trading Methodology based on Facts – Take time to develop a sound trading methodology. Develop your trading plan based on Facts, not emotions or hope.
- Always use a Stop Loss –A stop-loss is a predetermined amount of risk that a trader is willing to accept with each trade. The stop-loss can be either a dollar amount or percentage, but either way it limits the trader’s exposure during a trade. Using a stop-loss can take some of the emotion out of trading, since we know that we will only lose Y amount on any given trade. Ignoring a Stop-loss, even if it leads to winning trade, is bad practice. Exiting with a stop-loss and thereby having a losing trade, is still good trading if it falls within the trading plan’s rules. Although the preference is to exit all trades with a profit, it is not realistic. Using a Protective stop-loss helps ensure that our losses and our risk are limited.
- Keep Trading in perspective – It is paramount to stay focused on the big picture when trading. A losing trade should not surprise us if it is part of trading plan likewise a winning trade is just one step a long the path to profitable trading. It is the cumulative profits that make a difference. Once a trader accept wins and losses as part of the business, emotions will have less of an effect on trading performance. Setting realistic goals is an essential part of keeping trading in perspective. If a trader has a small trading account, he/she shouldn’t expect to pull big returns.
- Lastly know when to Stop Trading – There are two reasons to stop trading: an ineffective trading plan and ineffective trader. An ineffective trading plan shows much greater losses than anticipated in historical testing. Markets may have changed, Volatility within a certain trading instrument or the trading plan simply is not performing as well expected. You should remain unemotional, and take time to re-evaluate the trading plan and make a few changes or to start over with a new trading plan. An unsuccessful trading plan is a problem that needs to be solved. It is not necessarily the end of the trading business. An ineffective trader is one who is unable to follow his or her trading plan. External stress causes, poor habits and lack of physical activity can all contribute to this problem. A trader who is not in peak condition for trading should consider a break to deal with any personal problems be it health or stress that prevents the trader from being effective. After dealing with the difficulties the trader can resume trading.
It is important for any trader to understand each of these trading rules and how they work together. A good understanding of these rules, can go along way in helping traders establish a viable trading business. Remember that having a successful trading is all about hard work, discipline and patience to follow these rules. Join our Newsletter List.