What is the difference between Investing and Active Trading?

Investing and active trading are two very different forms of making money in finance. I will use the stock market to define the difference between active trading and investing. As an investor in the stock market, your goal would be to make money off the operations of the business. A smart investor uses fundamental analysis because the company needs to have a strong long-term outlook.  Making money off the operations comes through dividend payments and holding the investment for a long period of time. Think of Warren Buffet who has buy and hold forever stocks that consistently pay dividends on a quarterly basis. This is an investor style which is very different than short term trading.

As a trader I rely more on technical analysis and price action of a company to make a trade. The reason why traders use technical more than fundamentals is that they are trying to take advantage of short term price changes. There are many different trading strategies that I will define below. There isn’t a right or wrong strategy as long as you can trade profitably.

Which Method is Better?

This is something that has been long debated but you can make good money doing either strategy. As an investor you will see your account grow little by little over a long period of time and it doesn’t take as much time to manage a passive investment portfolio. On the other hand, being an active trader takes a lot of time every day studding charts and managing trades.

Popular Active Trading Strategies

  • Scalping

    This is a very sort term trading style that is commonly used in the Forex market. Scalp trades can last seconds up to 24 hours. These are short term trades where the trader has the goal of getting 20 pips a day.

  • Day Trading

    Day trading is commonly referred to as buying and selling a security in one day. This is technically less risky than longer term trading because there is a gap up and down risk associated with holding. When the markets open and close it will create price gaps. Sometimes these price gaps will be above your stop loss and you will lose more money than intended.

  • Swing Trading

    With swing trading you are trying to catch the 4 hour, daily and weekly swings on a security. Normally these trades are held for multiple days because if you are using a 4 hour or daily chart than it will take a while for price to move in the correct direction.