What Is Active Trading?

Have you ever wondered how some people seem to make money quickly in the stock market? They might be using a strategy called active trading. It's like playing a fast-paced game with stocks, where you buy and sell frequently to make quick profits.

What Is Active Trading?

Active trading is a way of making money in the stock market by frequently buying and selling stocks or other financial instruments. Unlike long-term investors who buy stocks and hold them for years, active traders are always on the move, looking for opportunities to make quick profits.

Imagine you're at a busy marketplace where fruit prices change every few minutes. An active trader is like a smart shopper who buys apples when they're cheap and quickly sells them when the price goes up, even if it's just a small increase. They do this often daily to make money from these small price changes.

Active traders usually focus on stocks that change price quickly and often. They use special tools and charts to predict these price changes. It's like being a weather forecaster but for stock prices instead of rain!
The main goal of active trading is to make more money than you would by just buying stocks and holding them for a long time. But remember, it's not easy and can be risky too. Active traders need to be very knowledgeable about the market and be ready to make quick decisions.

Types of Active Trading

There are different ways to do active trading, depending on how often you want to trade and how long you want to hold your stocks. Let's look at the three main types:

Day Trading

Most people think of day trading when they hear "active trading." It's like a one-day shopping spree in the stock market. Day traders buy and sell stocks within a single day and never keep any stocks overnight.
These traders look for big events that might quickly change stock prices. For example, if a company announces that it is buying another company, the stock price might increase. Day traders try to catch these quick price changes to make a profit.

Day traders use very short-term charts, sometimes examining price changes every 1, 5, or 15 minutes. This fast-paced activity can be exciting, but it can also be very stressful and risky.

Imagine you notice a stock opening at ₹500, and there's a buzz about a big announcement. You buy 100 shares, and by 2 PM, the company announces a new project. The stock jumps to ₹510, and you sell immediately, making a ₹1,000 profit. That's day trading – quick and exciting but stressful!

Swing Trading

Swing trading is a bit slower than day trading. It's like planning a shopping trip that lasts a few days or weeks. Swing traders hold onto their stocks for a few days or even weeks.

These traders are trying to catch bigger price movements. They're like surfers waiting for the perfect wave. They make decisions using charts showing price changes over hours or days.

Swing trading can be less stressful than day trading because you don't have to watch the market every minute. But you still need to keep a close eye on your stocks and be ready to sell when the time is right.

You notice a stock gaining momentum after a dip and buy 200 shares at ₹700 on Monday. Over the next two weeks, positive news boosts the price to ₹730. You sell and make a ₹6,000 profit. That's swing trading – a bit of patience for good returns.

Scalping

Scalping is the fastest type of active trading. It's like being a speedy shopper who runs into a store, grabs a bargain, and runs out again, all in just a few minutes or seconds.

Scalpers make tons of trades every day, sometimes hundreds! They're trying to make tiny profits on each trade, which can add up to a lot by the end of the day.

This type of trading needs super-fast computers and special software. It's not for beginners and can be risky if you don't know what you're doing.

For example, you scalp a stock by making 10 trades in five minutes, each time buying 50 shares and selling for a tiny ₹0.50 profit per share. By the end, you've made ₹250. Small amounts add up quickly in scalping.
Strategies for Active Trading
Now that we know the types of active trading let's talk about how active traders actually make their decisions. Here are some common strategies they use:

Technical Analysis

This is like being a detective who looks for clues in stock price charts. Traders use special patterns and indicators to guess where the price might go next. It's a bit like predicting the weather by looking at cloud patterns.

You spot a "golden cross" on a stock chart, indicating a bullish trend. You buy 100 shares at ₹800, and two weeks later, the price rises to ₹830. You sell and make ₹3,000. Reading charts can be profitable!

News-Based Trading

This strategy involves keeping up with the latest news and making quick trades based on that information. For example, if a company announces great profits, a trader might quickly buy that company's stock, hoping the price will go up when other people hear the news.

You see news about a new government policy and buy 300 shares of a relevant company at ₹200. The news spreads, and the price jumps to ₹207. You sell and make ₹2,100. Being quick with the news pays off!

Range Trading

This is like playing ping-pong with stock prices. Traders buy when the price hits a low point and sell when it hits a high point repeatedly.

You notice a stock oscillating between ₹200 and ₹220. When it dips to ₹201, you buy 200 shares; when it rises to ₹219, you sell, making ₹3,600. Rinse and repeat for profits.

High-Frequency Trading

This is a super-fast type of trading done by computers. It's so quick that humans can't keep up! These computer programs make thousands of trades in just seconds.

A trading firm's computer spots a small price difference in a stock between two exchanges. It buys 10,000 shares at ₹107.50 on one exchange and sells them at ₹107.51 on the other, instantly making ₹ 1,000. Speed is the key!

Momentum Trading

This strategy is about following trends. If a stock price rises quickly, a momentum trader might buy it, hoping it will keep going up. It's like jumping on a moving train!

You see a stock climbing from ₹350 to ₹370. Believing it will continue, you buy 100 shares at ₹370. Three days later, it hits ₹380, and you sell, making ₹1,000. Riding the wave can be rewarding!

Remember, these strategies can be complex and risky. Successful active traders usually spend a lot of time learning and practising before trading with real money.

Tools and Platforms for Active Trading

Active trading isn't just about strategy - you also need the right tools. Here are some things active traders use:

Trading Platforms

These are special computer programs or websites where you can buy and sell stocks. They show you real-time stock prices and let you make trades quickly. One of the popular trading platforms is 5paisa.

Charting Software

This helps traders analyse stock price movements. It's like having a super-detailed map of stock prices. Traders use these to spot patterns and make decisions.

Stock Screeners

These tools help traders find stocks that match certain criteria. It's like having a search engine for stocks.

News Feeds

Active traders need to know what's happening in the market right away. They use special news services that give them up-to-the-minute information.

Risk Management Tools

These help traders control how much money they could lose. It's like having a safety net while walking on a tightrope.

Mobile Apps

Many traders use smartphone apps to monitor the market even when they're not at their computers.
Remember, while these tools can be helpful, they don't guarantee success. Learning how to use them properly and understand their limitations is important.

Active Trading Compared to Active Investing

Active trading and active investing might sound similar, but they're quite different. Let's compare them:

Think of active trading as sprinting—it's fast and intense. Active investing is more like a marathon—it's slower but can last much longer.

Both approaches have their pros and cons. Active trading can potentially make money faster, but it's riskier and more stressful. Active investing is generally less risky and requires less time, but it might take longer to see significant profits.

Risks Associated with Active Trading

While active trading can be exciting and potentially profitable, it's important to understand the risks involved:

● Market Risk: Stock prices can change quickly and unpredictably. Even experienced traders sometimes make wrong predictions.

● Transaction Costs: Active traders make many trades, and each trade usually has a cost. These costs can add up and eat into profits.

● Time Commitment: Active trading requires a lot of time and focus. It can be stressful and might not suit everyone's lifestyle.

● Emotional Stress: The fast-paced nature of active trading can lead to emotional decisions, which might result in losses.

● Technology Risk: Active trading relies heavily on technology. Technical glitches or internet outages can lead to missed opportunities or unintended trades.

● Overtrading: There's a risk of making too many trades, which can increase costs and potentially lead to losses.

● Leverage Risk: Some traders use borrowed money (leverage) to increase their trading power. This can amplify both gains and losses.

● Regulatory Risk: Trading rules can change, potentially affecting trading strategies.

Remember, losing money in active trading is possible, especially if you're not well-prepared. Understanding these risks and having a solid plan before starting is crucial.

Conclusion

Active trading can be an exciting way to participate in the stock market, offering the potential for quick profits. However, it requires knowledge, skill, time, and tools. Due to its high-risk nature and the stress involved, it's not suitable for everyone. Before diving into active trading, it's crucial to educate yourself, practice with a demo account, and carefully consider whether it aligns with your financial goals and risk tolerance.