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From Passive to Active:

The Financial Spectrum

Here at Scarecrow Trading we specialize in something called Active Management, which is one of two types of management. Picture money management as a spectrum: on one end is passive management, on the other is active management. Under passive management is an approach commonly referred to as Buy & Hold. The opposite end of the spectrum under Active Management is home to another commonly known finance activity called Day Trading. You can find Scarecrow Trading right in the middle of that spectrum.  Our approach is referred to as Directional Trading

Buy & Hold

Buy and Hold, probably the most well-known trading strategy, is an example of a passive investment. The securities are chosen by an investor and held for long periods of time in order to see returns, as opposed to a day trader who is looking for a quick return. Those that invest in Buy and Hold generally believe that you can’t time the market and get probable returns. There’s quite a bit of debate between Buy and Hold and Active Management strategies and which one exceeds the other in performance and rate of return. A big reason for Buy and Hold’s popularity is the ease of it. Those that want to invest their money, but are intimidated by the market,  generally end up going with Buy and Hold. It requires almost no involvement, you simply purchase a stock, then sit and wait for your assets to grow. Because it is so low maintenance the fees to manage a Buy and Hold security are usually few and small. There are also tax benefits you can receive from using Buy and Hold as it defers capital gain taxes while your investment continues to grow. Buy and Hold, when implemented properly is usually successful; but Buy and Hold does not come without risk, you will deal with a degree of volatility because the stock will stay in the same position regardless of a bear or bull market. If held during a bear market you risk losing a lot of money which could then potentially take years to recover, while an active strategy may make additional profits off these market lows by selling as it drops.

Day Trading

Next on our list is Day Trading. Day Trading is when you purchase and sell securities in one trading day. Those that do Day Trading are usually well-versed with the stock market. They use their strategies to profit off the everyday volatility of the market. Day trading is high risk. Unless you are highly educated with the market it is normally advised against. Although, many people do make quick profits off day trading, the reality is the risk usually does not outweigh the rate of success.  Those professional day traders use strategies to decide their trades. The strategies include arbitrage, trading news, and swing trading. Swing Trading uses technical analysis (when you survey the statistical trends of the market through trading activity) and sometimes also fundamental analysis (the study of what affects a securities value and what that value may be and then compare to current price.) The goal of swing trading is to trade at a time where you can seize a price change. It’s all about predicting where you think the price will swing next. Trading News is exactly what it sounds like, when traders choose their position based on the current financial and economical news. Arbitrage is when one buys and sells a security on different markets or forms to profit off the difference in prices between each market. It is the only strategy of the three to be considered risk-free. One thing Day Traders need to learn to increase their chance of a successful trade is to not let their emotions rule their decision to buy or sell; when they do, their risk of loss increases. They must implement their strategies as mechanically as they are built. Directional trading works in that same way.

Directional Trading

Directional trading is what we use here at Scarecrow Trading. When you follow the direction of the market you are using Directional Trading. When prices are dropping, you sell, when prices are rising, you buy. To trade as a directional trader properly you need to have a confident idea of where the market is going to go, and with that you need some sort of risk-management. It’s common to find directional traders who use options to mitigate the risk of the market going the opposite direction as their trades We use two systems to tell us which way the market is going to go and everyday our systems gather together, and they assess multiple trends of the market until they come to one of three conclusions: Go Long, Short, or Cash. If the two systems agree on a long position, we go long, if both short, we go short, but if one system decides to go long and the other short, then we stay in cash. Directional trading has just started to get some spotlight among active management as more active managers are starting to take this approach as opposed to aggressive day trading. We are confident in our algorithms ability to assess the market accurately and to do so every day, completely mechanically. Directional Trading isn’t for everyone, but we have found our systems to outperform Buy & Hold of the S&P 500 for 10 out of the last 13 years. What has your money been doing these last 13 years? With 3rd party verified performance, let us show you what we can do with your money.

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