The best way to understand active trading is to differentiate it from buy-and-hold investing, which is based on the belief that a good investment will be profitable in the long term.
A buy-and-hold investor ignores day-to-day market fluctuations and is indifferent to short-term investing for two main reasons:
- He or she believes any momentary effects of the markets are really minor compared to the long-term average
- Short-term movements are nearly impossible to predict
Profile of an Active Trader
Active traders, however, see an average long-term return, not as an insurmountable standard, but as a run-of-the-mill expectation. To exceed the standard, or outperform the market, active traders believe they must look for the profit potential in the market's temporary trends, which means trying to perceive a trend as it begins and to predict where it will go in the near future.
Active Traders and Timing the Market
For active traders, the importance of the market's short-term volatility is magnified – these market movements offer opportunity for gains. Their style determines the time-frame for looking at trends. Some look for these within the span of a few months, some within a few weeks, and some within a few hours. Traders who analyse a shorter time-frame will be more active, and thus execute more trades. The more a trader strives to buy and sell at the extremes, the more aggressive – and risky – is his or her strategy.
Maximizing returns or outperforming the market isn't just about reaping profits; it's also about avoiding losses. Active traders will look for any signs that the security may take a turn for the worse. With this in mind, they try to time their exit the investment and seek profits elsewhere. Long-term traders, on the other hand, stay invested in the security if they have confidence in its value, even though it experiences a downward shift – the buy-and-hold investor will tolerate some losses that the active trader believes are possible to avoid.
Benefits We Offer to an Active Trader
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Our comprehensive range of products and services can help you prepare and implement financial strategies to address your goals. You can open a CIBC Investor’s Edge account online or by calling our Investment Representatives at 1 800 567-3343.
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