What is tactical trading?
Tactical trading (or tactical asset allocation) is a relatively short-term investment style based on anticipated market trends or relatively brief outlook changes based on fundamental or technical analysis. Tactical trading involves taking long or short positions in a variety of markets, from stocks and bonds to commodities and currencies.
Long-term diversified portfolios will often include an overlay of tactical operations, which involves allocating part of the portfolio to short and medium-term operations, in order to drive the overall portfolio performance.
Tactical asset allocation can be contrasted with longer-term strategic asset allocation.
- Tactical trading involves short-term investment decisions based on anticipated short-term price movements in a stock or market sector.
- Tactical trading can involve long or short bets on a wide range of markets and asset classes, as opportunities arise.
- Tactical trading is generally more complex and can involve higher risks than standard long-term (strategic) trading strategies and often requires much more attention and analysis.
- Often times, tactical trading overlaps with a broader strategic asset allocation.
How Tactical Trading Works
Tactical trading is an active management style in which the focus is typically on trends or technical indicators rather than long-term fundamental analysis. Generally, technical analysis is a more important consideration in tactical trading strategies, as it can be helpful in following price trends and determining optimal entry and exit points.
Tactical traders may seek to exploit short-lived market anomalies or more responsibly follow their investments in an active strategy that takes into account significant changes in the investment environment. Whatever the purpose, due to the shorter-term nature of tactical trading, these types of investors will typically choose to use both technical and fundamental analysis in their investment decisions.
Tactical business considerations
Tactical traders generally seek to implement more active trading strategies than just buy and hold. This type of trading can be important when investing in cyclical investments that can fluctuate substantially in different investment environments. It is also used by investors looking to identify short or intermediate profit opportunities that occur in the markets as new developments occur.
Tactical trading is generally more complex and can carry higher risks than standard long-term trading strategies. Tactical trading can also have tax implications that require the investor to extend their due diligence analysis to integrate capital gains taxes.
Tactical traders can follow the developments of a company that influence its immediate results, such as sales, income and profits. When looking to schedule an investment to take advantage of the way developments are affecting the stock price, the investor can also use technical charts. Technical charts can display a wide variety of patterns, channels, trends, and price ranges that can be used at the investor’s discretion to identify profitable entry and exit points.
In general, tactical traders will typically use a broader range of resources in their investment decisions to identify both short and intermediate profit opportunities. They can also take both short and long positions depending on their opinion of how market developments are affecting potential investments.
Tactical business strategies and opportunities
In global markets, there are several fundamental economic catalysts that are known to have specific effects on security prices. Sovereign interest rate policies are one of the most common catalysts for market changes worldwide. Governments adjust interest rates on interbank loans to help support borrowing for government agencies, private sector businesses, and individuals. When these rates rise, the issuance of new fixed income investments becomes more attractive to investors. When these rates go down, they can allow companies to lower their cost of capital, which can improve their bottom line. Following federal interest rates and interest rate trends can be an important development that tactical traders analyze to ensure that their portfolios are properly aligned with the current investment environment.
There are also many other broad market catalysts, such as trends in labor market conditions, revised international tariffs, global negotiations on oil production, varying levels of metal commodity production, and varying levels of commodity production. agricultural basics.
To institutionally manage the many variables that affect market environments, global macro investment strategies are used. Global macro and macro investment strategies are the most comprehensive types of tactical trading strategies. These strategies are used by hedge funds and are also available through publicly traded managed fund strategies. Macro strategies seek to manage a portfolio with the objective of identifying and leveraging tactical investing around macroeconomic changes that the investment manager expects to affect certain investments positively or negatively. Macro strategies can use both short and long positions to benefit from all kinds of changes that occur in the investment market.
Example: Smart Beta
Beta smart investing is a tactical trading strategy that combines the benefits of passive investing and the advantages of active investing strategies. Smart beta uses alternative index construction rules to traditional indices based on market capitalization, often using a bias towards specific industry sectors, value versus growth (or vice versa), or specific market capitalizations.
There is no one-size-fits-all approach to developing a smart beta investment strategy, as investors’ goals may differ based on their needs, although some managers are prescriptive in identifying smart beta ideas that create value and are economically intuitive. Equity smart beta seeks to address inefficiencies created by market capitalization-weighted benchmarks. Funds can take a thematic approach to managing this risk by focusing on mispricing created by investors seeking short-term gains, for example.