Passive Trading

The term passive trading denotes passive investment as it relates to trading. It can be used in reference to either the frequency with which trades are performed, or to an investment strategy. It is the direct opposite of active trading.

When used with regards to the frequency with which trades are performed: Passive traders are securities traders who rarely buy or sell securities, as opposed to active traders who frequently buy and sell securities.

When used to define an investment strategy: Passive traders are traders who follow a buy and hold strategy by buying shares in stocks or investment funds or investing in tradable investment instruments with the goal of holding these investments for long periods of time.

Passive trading strategies may be based on a belief that it is not possible for investments to outperform market growth over the long term. The results of numerous studies indicate that passive trading strategies outperform active trading strategies over the long term.

For this reason, many passive traders invest in passive investment vehicles like exchange traded funds (ETFs) and other index funds which attempt to match the performance of specific markets at the lowest possible costs.

More on this topic:
How to cut the cost of investing in ETFs

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