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What is Active Trading And How It Works


Active trading involves buying and quickly selling financial instruments to gain from short-term price movements. It is the opposite of the buy-and-hold strategy. In active trading, you choose to hold positions in highly liquid markets for a short period like minutes, a day, a few days or sometimes a few weeks.

Active trading focuses on stocks, futures, foreign currency trades, or instruments with high volumes. Such financial instruments allow you to enter and exit from positions quickly. 

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Furthermore, active trading usually involves high volumes of trade since price movements over the short term might be small. 

Active trading occurs within short periods. This is why economic or fundamental aspects usually do not play a role in this strategy. Instead, statistical and technical analysis is essential in predicting price movements. 

Active trading strategies

You can use the following strategies depending on how long you want to hold the financial instruments:

  • Scalping

Scalping is the most short-term active trading strategy. You can hold positions for a short period, like seconds or minutes. This active trading approach involves high trade volumes as the profit earned per trade is usually low. This allows you to gain from minor price differences over a very short period. 

In scalping, trading at the busiest time of the day can help you benefit from high trading volumes. Furthermore, you must constantly focus on charts for several hours to make quick gains. Using tick charts and one-minute charts can help you with the technical analysis. 

  • Day trading

Day trading involves buying and selling securities within the same day. This is done to avoid large overnight price movements. As a day trader, you don’t hold positions overnight and exit positions either with a profit or a loss. 

Day trading tends to focus on specific events expected to impact the share price. The events could be an acquisition that may raise a company’s share price or an annual budget that may impact the share price of companies in a particular industry. You can use one-minute, five-minute or fifteen-minute charts to perform technical analysis and make predictions on price movements. 

  • Swing trading

Swing trading involves holding positions for days, sometimes up to a few weeks. The aim is to take advantage of price volatility that precedes a firm trend reversal. 

As a swing trader, you can wait for price breakouts to ensure that predictions regarding price trend reversal are turning out as expected. You can carry out technical analysis using hourly, four-hour or day charts. You can also use algorithms to make the correct predictions. 

Active trading order types 

Despite keeping a constant eye on the stock market, you may miss out on critical opportunities while implementing other trades or due to other distractions. The following order types can help you buy and sell without watching over the prices every second of the day: 

  • Stop order 

Stop order allows you to capture a breakout. For instance, you bought stocks at Rs. 900 and may expect the price to cross Rs. 908. You can place a sell-stop order at Rs. 908.10 to sell the shares at this price. 

  • Stop loss

Stop loss allows you to limit losses. For example, you can sell the shares at a price higher than Rs. 908. However, you are unwilling to hold or sell shares below Rs. 896. You can set a stop loss at Rs. 896 in this scenario. 

  • Limit order

A limit order helps capture a favourable price during quick drops and rises. For instance, the prices may be at Rs. 908, but you want to see if you could buy at Rs. 907.50 on a quick drop. In this case, you can place a limit buy order at Rs. 907.50. Similarly, you can place a limit sell order at Rs. 910 if the price reaches this level. 


The goal of an active trading strategy is to outperform the benchmark index. This approach is more flexible as you can easily enter and exit the trades according to the market scenarios. You can opt for an active trading strategy if you have sufficient time to monitor market performance and wish to make quick gains. 

However, active trading is a high-risk approach as compared to passive trading. You have to deal with quick price shifts and react much quicker. Hence, a sound knowledge of the market and trends is crucial to predict price movements and avoid losses.  


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