In And Out: What It Means, How It Works

What Is In And Out?

In and out is a trading strategy whereby a single security or currency is bought and sold multiple times over a short period. In and out trading can last for a single trading session, or it can last longer but less than the period associated with a buy and hold trading strategy. It is a speculative approach to trading used to take advantage of short-term price.

Understanding In And Out

In and out refers to buying a stock, currency or other financial instrument (going into the market) and selling it quickly (getting out of the market). The process is repeated multiple times over a short period. It is predominantly used by day traders who are less interested in long-term growth. This strategy tends to be riskier, because it relies on rapid changes in price to be profitable. In and out trading typically uses technical analysis rather than economic fundamentals.

Day Trading

A day trader buys and sells within the same day and seeks to profit from short-term price moves. An in and out trader is a specific type of day trader who repeatedly buys and sells the same instrument rather than different instruments.

Day trading became popular during the high-tech boom of the late 1990s. Many people profited during the period of sharp price increases in the tech-heavy NASDAQ between October 1998 and March 2000. The cost of day trading can absorb the nominal profits. However, because sophisticated software and high-speed internet access are essential to deal profitably. Traders pay away the bid-offer spread when buying and selling, which can be substantial on small lots.

Technical vs. Fundamental Trading

In and out traders usually deal based on technical signals rather than fundamentals. Foreign exchange trading based on fundamentals incorporates factors such as a country's economic situation and outlook, international politics and interest rates. When trading stocks and bonds, investors and traders consider the business sector, profit outlook and, again, the economic climate. These factors can take weeks or months to have a major impact, so short-term traders focus on technical analysis. This approach ignores the intrinsic value of the object being bought and sold and focuses instead on trends and the speed of price movements. At its core, technical analysis is a study of supply and demand. Traders who buy and sell based on technical analysis are called "chartists" because they rely on charts and graphs that visually show price movements over time.

Capital Gains

In the United States, day traders are often subject to higher tax rates because of the disadvantageous treatment of short-term capital gains. Capital gains are taxed at the ordinary income rate. The tax rate for long-term capital gains generally tops out at 20%. The exception to this is hedge funds, whose day trading profits are taxed at the long-term capital gains rate.