If you’re coaching a football team, you might instruct your players that being aggressive will prevent your opponent from dictating the terms of the game. But if you’re an investor, being aggressive isn’t always the best way to reach your goals. Aggressive trading might sound like a faster path to wealth, but it's also a high-risk endeavor — and an easy way to ruin your account if you’re unprepared. In this article, we’ll discuss what it takes to adopt an aggressive trading mindset and review a few strategies for those investors with the proper risk tolerance.
What is an Aggressive Trading Strategy?
Aggressive traders act quickly in unique situations, whether it's a stock with a big earnings beat or a sudden spike in unemployment figures. When the meme stocks went parabolic in 2021, aggressive traders quickly identified similar heavily shorted stocks and profited from the eventual squeeze.
An aggressive trading strategy involves taking a high-risk, high-reward approach to markets, such as frequently trading with leverage or buying volatile securities. In order to be successful, you’ll need an intricate knowledge of different asset classes and investment analysis. Aggressive trading is not meant for beginners, and you should never attempt an aggressive strategy using capital you can’t afford to lose.
Because aggressive traders seek big profits in short timeframes, they often use options or borrowed money to enhance leverage. Borrowing money from your broker is known as margin, and it can increase your trading capital (and therefore profits on winning trades). But borrowing money or writing options can also lead to significant losses and margin calls if you aren’t careful. Use MarketBeat’s risk tolerance assessment to ensure you have the proper temperament and experience level for aggressive trading.
Pros of Taking an Aggressive Approach to Trading
Using aggressive trading strategies can be advantageous when done correctly. Here are the benefits of adopting this strategy:
- Higher Potential Returns: Aggressive trading often involves targeting high-growth assets or short-term price movements, which can lead to substantial gains if the trades are successful.
- Capitalizing on Short-Term Opportunities: Aggressive traders can take advantage of market volatility and price swings that more conservative strategies might miss, allowing for quicker profits.
- Leverage Opportunities: By using leverage, aggressive traders can control larger positions with less capital, which can amplify profits when trades go in the desired direction.
- Diversification: Aggressive trading allows for the use of different strategies, such as day trading, swing trading, or options trading, providing flexibility and the chance to explore various markets and sectors.
- Maximizing Market Timing: Aggressive traders often seek to capitalize on short-term market trends, news, or catalysts, which can lead to quicker results compared to long-term investing.
Cons of Taking an Aggressive Approach to Trading
Aggressive trading isn’t for everyone, and the risks are high. Here are a few downsides to consider before adopting this strategy:
- Higher Risk of Loss: Aggressive trading involves higher volatility and the possibility of significant losses, especially when using leverage. If aggressive trading had a high success rate, there wouldn’t be nearly as many buy-and-hold investors. Most traders who attempt day or swing trading lose money; even the best still make mistakes or have bad weeks. These are risky strategies, and you must be prepared to lose occasionally.
- Requires Significant Time and Attention: Are you ready to spend hours in front of a screen? Aggressive trading requires more than just sitting at your computer during market hours. You’ll need to study charts, review financial statements, listen to conference calls and backtest strategies before the market even opens! Becoming a successful short-term trader requires a lot of time and energy.
- Increased Transaction Costs: Frequent buying and selling associated with aggressive trading can result in higher transaction fees, reducing overall profits. These costs can add up, particularly in markets with commissions or spreads.
- Emotional Stress: Aggressive trading doesn’t just absorb your time and capital; it also can take a toll on your psyche if you aren’t prepared for the process. Constant monitoring of trades can cause anxiety, especially during volatile market conditions. You must be able to handle loss and not react emotionally to bad trades. And if you lose more than you can afford, it can strain your life outside the markets.
- Tax Implications: Short-term capital gains from aggressive trading are often taxed at higher rates than long-term investments, which can reduce overall returns.
Methods to Consider When Building an Aggressive Trading Strategy
Aggressive trading is more of a mindset than a strategy. It involves analyzing and trading assets in many different markets using all kinds of technical and fundamental signals. No two traders have the same exact mindset, so why would everyone trade using the same techniques? That being said, aggressive traders utilize a couple of common methods.
Momentum Trading
Momentum trading is a technical trading method involving assets trending strongly in one direction or another. Momentum traders sell assets in a downtrend and buy assets trending upward. Time periods for momentum trading can be as short as a single trading session to as long as multiple weeks. Traders use technical analysis tools like the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD) to correctly identify stocks with momentum. Also known as trend following, momentum trading can be risky since trends can change if a catalyst like a poor earnings report occurs.
Derivatives Trading
Many aggressive traders supplement traditional stock trading with derivatives like options or futures. Options and futures are financial contracts that derive their value from a different underlying asset, such as a stock, commodity or currency. Stock options give traders control of large positions with minimal capital since each contract gives holders the right (but not the obligation) to purchase 100 shares at a predetermined price and date. Some derivative strategies are riskier than others, but these securities are volatile, and you’ll need to understand how they work before attempting to trade them.
Breakout Trading
Support and resistance are essential for technical traders because they provide actionable information on where to enter or exit a stock position. Breakout trading uses support and resistance to find stocks about to ‘break out’ from a trading range and create a new trend. Breakout traders also use technical analysis tools like Bollinger Bands and chart patterns like wedges and pennants to anticipate breakouts.
When Should You Consider Aggressive Trading?
Let’s reiterate it: aggressive trading isn’t for everyone. You need the right situation and mindset to be successful. So who has the best potential to be successful with an aggressive trading strategy? Consider the following list and see if you check all the boxes:
You Have a High Risk Tolerance
Aggressive traders don’t win every time, and bad days or weeks can snowball without the proper risk tolerance. How well do you handle losing money? Can you deal with stressful trades involving margin or derivatives? Are you comfortable trading in volatile stock sectors like tech or pharmaceuticals? If you don’t have a high risk tolerance, aggressive trading may not be your best investment path.
You Have the Time to Properly Commit
Aggressive trading can be exciting but also requires a tremendous commitment. You’ll need to devote many hours to market research and be present during the open market session. If you have a large family, a career with long hours, or other time-consuming responsibilities, the time requirements make aggressive trading strategies unfeasible.
You Have a Deep Understanding of Markets and Asset Classes
If you are an encyclopedia of asset and market knowledge, you may find success with an aggressive trading strategy. Because they often find themselves in unique situations, aggressive traders must understand how different assets function in specific environments. You’ll need to know how to study charts, interpret technical trading signals, read financial statements, and understand economic data.
Aggressive Trading Can Be Rewarding, But You Must Be Careful
Aggressive trading can increase profits, but it also increases risk since timeframes are shorter and leverage is often applied. Derivatives and trading on margin are advanced concepts and not recommended for inexperienced investors just starting in the markets. If you have lots of experience and the risk tolerance to handle loss, an aggressive trading strategy could increase your profits without causing stress. But if big price swings make you anxious, consider the benefits of a safer buy-and-hold strategy.
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