What is active trading?

What is active trading?
Table Content
Understanding active trading
Active trading strategies
Active trading compared to active investing
Example of active trading
How to get started in active trading and investing
When is crypto trading most active
Bottom line

You can apply several different techniques to trade effectively. One of the most effective strategies is a technique called active trading. Active trading is the hands-on approach of buying and selling quickly when investing in stocks and shares. It differs from active investing, which is usually based on ETFs or other financial assets or instruments. 

Active trading involves techniques where you actively explore the market and can sometimes make multiple trades on the same day. Once you understand the difference between active trading and active investing, you are better placed to implement this decision based on market conditions that you discover.

Understanding active trading

To get into the mindset of a trader who uses active trading successfully. We must first explore the market conditions that allow active trading to become a successful strategy. Generally speaking, in markets, active trading involves taking advantage of short-term market volatility. 

This involves active assessment of the market and studying the figures to see whether the asset is operating within its standard range. 

Active trading strategies

One example of an active trading strategy is called scalping. Scalping involves usually buying a large amount of a stock or asset and selling it once it increases by a small margin. Usually somewhere in the range of 2-3% - although depending on the appetite for risk and whether it is an individual investor or an institutional investor, this range can vary. 

The positives of this strategy mean your position is not open for very long and can allow you to rest easier than holding a long position over several days or weeks. However, it requires active attention to the market if you haven’t implemented an automated sell order, which many traders do.

Another strategy is a strategy called mean reversion. This strategy involves traders studying the stock market or a general market to find out the “mean price” or the “natural price”. Let’s use cryptocurrency as an example. If the cryptocurrency operates beneath the mean price, this could signal a buying opportunity. An active trader would enter the market at this point, and if the crypto bounced back to its natural price within a few hours, they would sell it and take the profit.

Active trading compared to active investing

Active trading and active investing operate broadly under the same rules. Active trading is a quickfire approach to consistently monitoring asset data, such as charts and graphs, to identify a short-term market opportunity. Active investing works in a similar way but involves a long-term approach. 

For example, one instance of active investing would be identifying on a calendar that a company is due to release a new innovative product, is expanding into new territory, or announcing a partnership with a much larger and established entity within its field. 

If there were talks of this partnership unfolding, you would look to purchase the stock straight away, dependent on the news being released. Any potential mergers, partnerships or product announcements usually take a few months to complete. In the meantime, your investment would stay medium to long-term with one eye on the news. 

Once the company announced this, the stock would spike as individual and institutional investors trade the news. At this point, it may very well hit the price you wanted, and your investment has been successfully executed. 

The main difference between active trading and active investing is the time they take. Active trading is usually done over a much smaller period and relies on short-term market news. Active investing looks at the bigger picture over a longer period.

Example of active trading

One example of active trading would be purchasing a cryptocurrency while in a 7-day downturn. Usually, this would result in the price falling below its “natural price”, which is part of the mean reversion strategy we discussed earlier. Identifying and using this market trend as a potential buying opportunity is an example of active trading. 

Hopefully, once the price returns to its natural price, be it within a few hours or days, you will sell at that price. Scalping, which we discussed at the beginning of the article, is also an example of active trading.

How to get started in active trading and investing

In today’s day and age, getting involved in any type of trading has never been easier. Traditionally, markets were usually inaccessible to small individual traders. However, since the rise of the internet and computing technology, getting involved in all types of trading has never been easier. 

If you’re a beginner looking to get started, you can trade using straightforward apps designed to help beginners. The likes of amana is a mobile trading app where you can access free tutorials and literature to learn the basics about trading and investing strategies such as active trading and active investing.

When is crypto trading most active

It can be hard to distinguish when cryptocurrency markets are most active. As they are a 24-hour market, there are spikes multiple times throughout the day. Usually, for UK markets, peak hours tend to spike around midday during the week. This is traditionally when most traffic is examined coming from UK traders. The same applies in the United States, where traders will generally check the market first thing in the morning and trade any news.

Throughout 2021, the cryptocurrency market exploded, and several cryptocurrencies smashed through their all-time highs. This included the vast majority of cryptocurrencies you can find in the top ten. The snowball effect of international markets getting involved in the “bull run” resulted in substantial gains for many investors who got to the party early.

The cryptocurrency market would often react promisingly to huge news. One example is when the cryptocurrency Decentraland (MANA) increased in price by nearly 400% over two days. 

As this cryptocurrency is based in the Metaverse, the announcement that Facebook changed its name to Meta caused mass hysteria. Many speculators presumed that Facebook would enter the Metaverse. Following this, huge institutional investment could potentially flow into that cryptocurrency and the market as a whole.

Bottom line

Now that you understand the difference between active trading and active investing, you can try your hand at active trading and see if it's the right fit for you. We at amana wish you the best of luck and the highest returns on your investment.

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