,

Day, Position, Scalping & Swing Trading: Which of the 4 Types of Active Trading Are You?

By Myles Leva

-

Last Updated: March 22, 2022

Share

Active trading is a growing phenomenon. Once a niche of institutional investors, the Covid-19 era has seen many everyday investors take up the trade.

Within the “active trading” umbrella, there are 4 main types of active trading. In this article, we will explain:

  • Each type of active trading
  • How it works
  • Why people do it
  • The unique risks

 

What is Active Trading?

Active trading is any trading strategy that is based on buying and selling securities based on short-term price fluctuations. It is the antithesis of passive trading, which involves long periods of time.

There is no numerical barrier based on time and price which defines “active trading”. However, active trading requires daily attention (at the least). Active trading also always involves more risk than traditional passive investing, which primarily involves tracking safe indexes.

Within the “active trading” umbrella, there are actually several strategies. Each active trading type offers a different level of activity, however. For example, day trading is by far the most active, requiring many individual actions during a single trading day.

In this article, we will simply look into:

  • The active trading types
  • What is needed to succeed in them
  • The unique challenges associated with each

 

What Is Position Trading?

Position trading is a strategy that is long-term and thus less concerned with short-term fluctuations.

Position traders select their investments based on long-term viability. They follow trends that they can benefit from and they position themselves to benefit from those trends. While this requires a lot of research, it is certainly less demanding than short-term trading strategies.

As a type of buy-and-hold/passive investing, position trading is closer to investing than any other kind of active trading. To be successful, position traders must identify the right entry and exit points. They also must understand how to use stop-loss orders to control for risk.

As a philosophy, position trading is all about exploiting upward trends as much as possible. So, the process involves:

  1. Understanding a certain market segment
  2. Finding long-term opportunities
  3. Controlling for risk
  4. Selling at a profit

To make the job easier, like other traders, position traders may use a mix of:

  • Technical analysis
  • Fundamental analysis
  • Macroeconomic knowledge
  • Normally, industry/segment-specific knowledge
  •  Historical data

While this may look slightly complicated, we are actually starting with the least demanding trading strategy. Of all the active trading strategies, position trading takes the least time.

 

What is Day Trading?

Day trading, as the name suggests, is a particularly active strategy. Not long ago, only institutional investors were able to day trade at all. Only during the last few decades has the technology and culture that can facilitate individual day trading developed.

Day trading is the buying and selling of securities within the same trading day.

That means that day trading is indeed a full-time job. Most day-traders focus on Forex or stock markets, the only markets where such a strategy is really possible.

Day traders need to be highly knowledgeable and well-equipped to achieve long-term success. They follow short-term market moves. So, as a day trader, you need to be up-to-the-minute with factors like:

  • Any relevant breaking news
  • Scheduled announcements including:
  1. Interest rate changes
  2. Corporate earnings releases
  3. Economic statistics updates

Day trading is perhaps more well-known in popular culture, but it’s a controversial practice for a few reasons:

  • There have been many scams trying to lure people into “day trading” with the promise of high rewards (get rich quick schemes)
  • The practice itself is very demanding and high-risk
  •  Most professionals, including the best of the best, do not like the idea

While day trading has become more popular recently and has led to many alleged success stories, it is still a risky practice. Education, mentality, and the right resources are required to become proficient at it. If you don’t have a lot of time, money, and attention to direct towards it, day trading is not advisable.

 

What is Swing Trading?

Swing trading lands somewhere in between day trading and position trading.

Swing trading means attempting to capture short-to-medium term gains in a security. This active trading process normally lasts from a few days to a few weeks for any given security.

Because of this time frame, it is less demanding than day trading. But it still requires the heavy use of technical analysis, and often some fundamental analysis as well.

Because of its timeframe, swing trading is the balanced active trading strategy. But the risk is still very high when compared to any passive investment strategy. Swing traders face overnight and weekend risks.

When the trading day is off, there can be developments that cause a security to open at a very different price. These gaps can be a huge problem.

Swing traders mitigate risk with:

  • Research-backed profit targets
  • Stop loss orders
  • Technical analysis, insofar as it can be reliable

 

What is Scalp Trading?

Scalp trading is a strategy that seeks to profit off very small price changes. The idea is to resell securities quickly. The philosophy is based off the logic that by minimizing exposure to the market, you minimize your chances of experiencing a negative event.

So, you want to enter and exit a position quickly, profiting by quickly scalping securities during the moments they start to ascend.

The other key logic behind scalp trading is the ease of realizing such minuscule individual profits. It takes larger shifts in supply and demand to realize the profits that other investors are aiming for.

But it’s very easy for a security to see a price rise of a few cents at any point during the trading day.

The last major aspect of the scalp trading logic is that small movements are far more common than large ones. Even during the quietest, most uneventful days, it is possible to scalp from some small movements.

Large companies like Apple see many transactions throughout the trading day, causing small changes every minute.

Scalp trading has some unique challenges and risks:

  • Timing is difficult, and you need to enter to the penny, every time, many times
  • Commissions add up with such an active strategy
  • You are working a lot more to make many, much smaller gains
  • It’s a uniquely exhausting strategy

 

Conclusions

Active trading is normally not recommended for anyone new to investing in general. Each active trading strategy involves much more work and much more risk than a passive investing strategy.

However, active trading can be attractive to many people due to its faster pace and excitement. But for active trading to be highly profitable, you need to invest a lot of time and money into it.

If you’re considering active trading, it’s worth it to consider the different strategies people use. Some active trading strategies will be too exhausting for you, but that’s fine. That’s why delving into the theory behind each active trading type can help you make the right decision for you.

Photo by Liza Summer from Pexels

YOU MIGHT ALSO LIKE

Leave a Reply

Your email address will not be published. Required fields are marked *

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

LATEST

Subscribe for daily financial content

Daily articles, financial messages and affirmations to best help you navigate your financial future.