4 common active trading strategies
In the end, any one of these three methods can be a trading strategy that could help you make a lot of money in the stock market. While the risk can be high, the reward for a talented or dedicated trader can be even higher. To learn more about trading and investing, sign up for the free Trade of the Day e-letter below. Brian M. Reiser has a Bachelor of Science degree in Management with a concentration in finance from the School of Management at Binghamton University. He also holds a B. Search for:. Reiser Originally posted September 30, Updated on October 7 at pm.
Articles by Brian M. December 30, December 29, December 18, Related Articles. Financial Literacy Small Cap vs. March 29, March 28, Range trading, or range-bound trading, is a trading style in which stocks are watched that have either been rising off a support price or falling off a resistance price. That is, every time the stock hits a high, it falls back to the low, and vice versa. Such a stock is said to be "trading in a range", which is the opposite of trending.
A related approach to range trading is looking for moves outside of an established range, called a breakout price moves up or a breakdown price moves down , and assume that once the range has been broken prices will continue in that direction for some time. Scalping was originally referred to as spread trading. Scalping is a trading style where small price gaps created by the bid—ask spread are exploited by the speculator. It normally involves establishing and liquidating a position quickly, usually within minutes or even seconds.
Scalping highly liquid instruments for off-the-floor day traders involves taking quick profits while minimizing risk loss exposure. The basic idea of scalping is to exploit the inefficiency of the market when volatility increases and the trading range expands. Scalpers also use the "fade" technique. When stock values suddenly rise, they short sell securities that seem overvalued.
Rebate trading is an equity trading style that uses ECN rebates as a primary source of profit and revenue. Most ECNs charge commissions to customers who want to have their orders filled immediately at the best prices available, but the ECNs pay commissions to buyers or sellers who "add liquidity" by placing limit orders that create "market-making" in a security.
Rebate traders seek to make money from these rebates and will usually maximize their returns by trading low priced, high volume stocks. This enables them to trade more shares and contribute more liquidity with a set amount of capital, while limiting the risk that they will not be able to exit a position in the stock. The basic strategy of trading the news is to buy a stock which has just announced good news, or short sell on bad news.
Such events provide enormous volatility in a stock and therefore the greatest chance for quick profits or losses. Determining whether news is "good" or "bad" must be determined by the price action of the stock, because the market reaction may not match the tone of the news itself.
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This is because rumors or estimates of the event like those issued by market and industry analysts will already have been circulated before the official release, causing prices to move in anticipation. The price movement caused by the official news will therefore be determined by how good the news is relative to the market's expectations, not how good it is in absolute terms. Price action trading relies on technical analysis but does not rely on conventional indicators.
These traders rely on a combination of price movement, chart patterns, volume, and other raw market data to gauge whether or not they should take a trade. This is seen as a "minimalist" approach to trading but is not by any means easier than any other trading methodology. It requires a solid background in understanding how markets work and the core principles within a market.
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However, the benefit for this methodology is that it is effective in virtually any market stocks, foreign exchange, futures, gold, oil, etc. Market-neutral trading is a strategy that is designed to mitigate risk in which a trader takes a long position in one security and a short position in another security that is related. The increased use of algorithms and quantitative techniques has led to more competition and smaller profits.
Retail traders can buy commercially available automated trading systems or develop their own automatic trading software. Commissions for direct access trading , such as that offered by Interactive Brokers are calculated based on volume, and are usually 0. The more shares traded, the cheaper the commission. Most brokers in the United States, especially those that receive payment for order flow do not charge commissions.
The numerical difference between the bid and ask prices is referred to as the bid—ask spread. Most worldwide markets operate on a bid-ask -based system. The ask prices are immediate execution market prices for quick buyers ask takers while bid prices are for quick sellers bid takers.
Good Day Trading Strategies
If a trade is executed at quoted prices, closing the trade immediately without queuing would always cause a loss because the bid price is always less than the ask price at any point in time. The bid—ask spread is two sides of the same coin. The spread can be viewed as trading bonuses or costs according to different parties and different strategies. On one hand, traders who do NOT wish to queue their order, instead paying the market price, pay the spreads costs. On the other hand, traders who wish to queue and wait for execution receive the spreads bonuses. Some day trading strategies attempt to capture the spread as additional, or even the only, profits for successful trades.
Market data is necessary for day traders to be competitive. A real-time data feed requires paying fees to the respective stock exchanges, usually combined with the broker's charges; these fees are usually very low compared to the other costs of trading. The fees may be waived for promotional purposes or for customers meeting a minimum monthly volume of trades. Even a moderately active day trader can expect to meet these requirements, making the basic data feed essentially "free".
In addition to the raw market data, some traders purchase more advanced data feeds that include historical data and features such as scanning large numbers of stocks in the live market for unusual activity. Complicated analysis and charting software are other popular additions. These types of systems can cost from tens to hundreds of dollars per month to access.
In , the U. It's paramount to set aside a certain amount of money for day trading. Start small. Especially as you begin, you will make mistakes and lose money day trading. Keep an especially tight rein on losses until you gain some experience. You may have a run of luck, especially if the market's in a sustained bull run. Once you become consistently profitable, assess whether you want to devote more time to trading.
Get trusted investing insights. You can day trade bonds , options , futures , commodities and currencies, but stocks are among the most popular securities for day traders — the market is big and active, and commissions are relatively low or nonexistent.
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Typically, the best day trading stocks have the following characteristics:. Good volume. Liquidity allows a trader to buy and sell without affecting the price much. Currency markets are also highly liquid. Some volatility — but not too much.
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Volatility means the security's price changes frequently. This kind of movement is necessary for a day trader to make any profit. Someone has to be willing to pay a different price after you take a position. Will an earnings report hurt the company or help it? Is a stock stuck in a trading range, bouncing consistently between two prices?
Knowing a stock can help you trade it. Media coverage gets people interested in buying or selling a security. That helps create volatility and liquidity. Many day traders follow the news to find ideas on which they can act.