All kinds of traders need to re-evaluate and refine their investing styles and strategies on a regular basis. As we gain investing experience and knowledge, the view that we have on the market changes. It may even broaden how we see our present and future financial goals. Outperforming the market generally means trying to do just that and, more importantly, gaining greater returns that the market average, or active trading.
Active Trading Overview
The best way one can understand active trading is to differentiate it from buy-and-hold investing, in which the belief is that a good investment will be profitable in the long term. This means that they ignore day-to-day market fluctuations.
Using a buy-and-hold strategy, you may have to be indifferent to the short term for two main reasons: because you believe any momentary effects of short-term movements are just minor compared to the longer term average, and because short term movements are nearly impossible to predict.
Meanwhile, an active trader isn’t keen on exposing his or her investment to the effect of short term losses or missing the opportunity of short term gains. It’s not surprising that active traders see an average long term return not as insurmountable standard but as a normal expectation.
To outperform the market, the trader must look for the profit potential in the market’s temporary trends, which means attempting to perceive a trend as it begins and predict where it will go.
Short Term Performance
Traders are active because for them the importance of the market’s short term activity is magnified. These market movements provide opportunity for sped up capital gains. A trader’s style determines the time frame within which he or she looks for trends. Some look for trends within a period of a few months, while others prefer a few weeks or even hours. Since a shorter period will see more definitive market movements, a trader who is analyzing a shorter time frame will be more active, executing more trades.
However, a greater number of trades doesn’t necessarily equate to larger profits. Outperforming the market doesn’t always mean maximizing your activity but maximizing your chances with a strategy. An active trader will try to buy and sell at the two extremes of a trend within the given time frame.
When buying a stock, a trader may try to buy it at the lowest point possible, or upward turning point, and then sell it when there are signs that it has reached a high point. These signs are generally observed by means of technical analysis tools.
The Risk of Active Trading
Active trading offers the enticing potential of above-average returns, but like almost anything else, it cannot be achieved successfully without costs and risks.
The shorter time frame to which traders devote themselves offer a vast potential, but since the market can move very fast, the trader must know how to read it and then react accordingly. Without enough skills in discerning signals and timing the entries and exits, the trader may not only miss opportunities but also suffer the blow of quick losses.