Skip to content Skip to footer

Active Trading Versus Investing

What is the difference between active trading and investing, and which approach should I use?

It has been said it’s like the difference between the actions of one individual versus the actions of a group as a whole. Each strategy has certain advantages. Investors stand to make a lot of returns over a significant period of time, as long as the stock goes in the intended direction.

For more volatile stocks, those that are not necessarily expected to continue to rise or fall in a certain direction, short-term trading, sometimes known as scalping depending on the relative timeframe, exemplify the active investing style that can make the most of the fluctuations of the market.

So what does active trading mean?

Active traders, or “day traders” make money in every type of market cycle – bull or bear.
An active trader buys and sells stocks with the intention of making money in the short term. Active traders typically don’t hold individual stocks for many months or years, and generally do not focus on long-term economic trends.

They also need to actively manage risk.

Active traders need the flexibility to take either side of a trade if something changes in the market.
Timeframe analysis is a critical factor for active trading, something we discuss later in this report, but in general, active trading is always based in high probability setups, and usually within a trading day.

The sole purpose of active traders is to attempt to profit from the daily price fluctuation of a particular stock. They rely on technical analysis rather than fundamental analysis for predicting these price fluctuations, making multiple trades, scaling in and out of positions throughout the trading day.

OK – but is active trading for me?

Active traders sometimes border on the fanatical. They read everything on investing, study stocks, and subscribe to magazines, associations, or newsletters such as New York Times newspaper. Their motivation can be to flip stocks and make money fast, or it can be the satisfaction of finding a treasure missed by Wall Street pundits. Whether driven by wealth or ego, this type of investor turns to invest into their hobby and even passion.

Active traders have the potential to make (or lose) money quickly but must devote much more time to trading than most long-term investors do.

Active traders prefer stocks that are rising and promise to be a forerunner for future outperformance. They have one focus, accelerating earnings, such as from a company that has tapped into a new product or innovation that promises to hit the market hard. There are many approaches to picking stocks, based on a number of factors including stock price behavior, markets, and earnings growth.

What makes active trading most appealing to some is that active trading is not limited to professional day traders. Active trading can be used by any individual who seeks to build a plan for taking control of their assets.

But does investing become more appealing for high net worth investors, who have opportunities that small investors do not?

This type of trader is often interested in investing their money, but they do not want to spend their weekends studying financial statements, markets, and even weather reports, often happy to put their money in the hands of a financial manager and walk away.

The investor creates a plan, researches stocks, invests, and then patiently waits for a return in the future, but also has a lack of flexibility, and is at the mercy of the system, having money tied up over long periods of time.

An investor takes a look at the company’s value, assets, debt, and financial health. They consider market and competition when estimating the company’s opportunity for success. They are not aggressive or looking for a quick gain.

Trading psychology

As long as their losses are not at the high-risk level, they leave their portfolio alone. They follow the 10% rule when estimating acceptable loss. Once a stock falls 10% below what they paid, it is time to sell to the bargain hunters.

Investing can deliver a decent return in the long run with a minimum of involvement. It is of most critical to an investor to choose stocks that have good potential to increase steadily in value over the term of the investment (which is extremely difficult), and selecting a diversified portfolio, to offset the unforeseen fate of one particular company or market sector.

If executed correctly, the main advantage of investing is that it can bring in a lot of profit.

Taking the auto industry as an example – when the auto industry was greatly suffering, investors may buy a significant amount of shares of a car company that they think will rebound, and wait years for the industry to improve, and the company stock to increase.

Although investors regard short-term fluctuations in stock prices as minor compared to long-term growth, they still can’t just pick a portfolio and forget about it.

Investors may not even monitor stock for fear that checking in regularly could reveal enticing short-term values that might cause the investor to abandon their strategy and settle for short-term gains rather than the expected, more favorable long term. However, investors should re-evaluate the performance of their stocks periodically and respond to long-term market changes.

Thinking like a professional.

Few things are certain in the trading world, but thinking like a professional trader helps the odds weigh in your favor.

Whether you choose to actively trade in smaller timeframes during the day or build positions over time and invest, the key to success in any style is to think like a professional.

For instance, professional traders do not follow the irrational nature of the herd.

Professionals tend to be cautious when others become too greedy. On the other hand, professionals tend to be aggressive when others become anxious and overly fearful.

Above all else, professional traders always place the greatest emphasis on risk management. Seeing both the potential gains while being aware and ready for potential losses, are keys to being a professional trader, regardless of the timeframe.

RORY COLLINS
Trader
rcollins@rhino-report.tradeviewforex.com

Tradeview Ltd. is not a portfolio manager or an investment advisor. This Market Report is for informational purposes only. Any statements made or opinions voiced in this Market Report do not constitute investment advice. The Tradeview Ltd. Market Report does not constitute a solicitation to buy or sell in the financial markets. Although the information contained in the Market Report comes from trusted sources, Tradeview Ltd. is not responsible for guaranteeing the accuracy, timeliness, completeness, or fitness of such sources. Tradeview Ltd. shall not be responsible for and disclaims all liability for any losses which may be suffered from access and use of the contents of the Tradeview Ltd. Market Report. Trading any financial instrument on margin, using leverage or otherwise involves considerable risk. Therefore, before deciding to participate in any style of trading, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose. Consulting with your investment counselor, attorney, accountant or other professional upon whom you rely for guidance as to the appropriateness of an investment in any style of trading is recommended.

Tradeview Ltd.

Is licensed to carry on securities investment business and is regulated by the Cayman Islands Monetary Authority (CIMA) as a full securities broker-dealer. Tradeview conducts business pursuant to the Cayman Islands Securities Investment Business Law (SIBL) and its activities fall under the direct supervision of the Investments and Securities Division of CIMA.
Headquarters: 5th Floor Anderson Square, 64 Shedden Road, Georgetown, Grand Cayman, Cayman Islands KY1-1002, BWI.
Website: www.tradeviewforex.com

Tradeview Asia Ltd.

Is licensed and regulated by the Labuan Financial Services Authority (FSA) as a Money Broker, registration number LL15870 licensed to facilitate transactions in foreign exchange pursuant to Labuan Financial Services and Securities Act 2010, the Labuan Companies Act 1990 and the Labuan Business Activity Tax Act 1990.
Headquarters: International Business Financial Centre at Office 5, Jamie Business Center I, Unit F10, First Floor, Paragon Labuan, Jalan Mustapha, 87000 Labuan F.T.
Website: www.tvmgloballtd.com

Tradeview Europe Ltd.

Is licensed as a Category 2 Investment Service Company and is regulated by the Malta Financial Services Authority (MFSA). The Malta Financial Services Authority (MFSA) is the single regulator for financial services in Malta. MFSA is a fully autonomous public institution and reports to Parliament on an annual basis. The MFSA is a member of the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the International Organization of Securities Commissions (IOSCO) and is a signatory of the Multilateral Memorandum of Understanding with other European regulatory Institutions. Tradeview is authorized to provide financial services across multiple asset classes and is passported in the EU/EEA under MiFID II (EU Markets in Financial Instruments Directive).
Headquarters: 157 Archbishops Street, Valletta VLT Malta 1440.
Website: www.tradeview.eu

Tradeview Financial Markets S.A.C Global

Is authorized to conduct business pursuant to and in compliance with the General Law of Companies (LGS) promulgated by the government of Peru. Tradeview Financial Markets S.A.C is registered with the National Superintendence of Public Registries (SUNARP), company number 13089531. Tradeview Financial Markets S.A.C provides financial services in selected OTC derivative markets in compliance with all applicable government regulations.
Headquarters: Los Mirtos 239 Urb. San Eugenio, Lince, Lima, Perú.
Website: www.tradeviewlatam.com