Passive Trading Made Simple: How to Trade With Minimal Effort in 2024

Trading has long been considered a complex and time-consuming endeavor. But what if there was a way to trade without dedicating endless hours or stressing over every market fluctuation?

With a passive approach, you can trade stress-free while keeping your focus on other priorities.

This guide breaks down passive trading – from the fundamentals to popular strategies and methods.

What is Passive Trading?

In simple terms, passive trading is a way to trade without constantly watching the markets or making quick decisions. Typically, active trading demands tracking every price move and making frequent trades. In comparison, passive trading focuses on long-term strategies or complete automation.

The goal is simple – stay in the market, minimize effort, and let your approach do most of the work.

Let’s break it down with an example. Suppose you’re interested in trading BTC but don’t have the time or energy to check its price daily and execute positions. Instead, you could set up a trading bot to do the heavy lifting.

For instance, you could program it to buy BTC if the price drops by 5% and sell if it climbs by 10%. The bot runs these trades automatically while you go about your day – working, relaxing, or even sleeping. It’s like having a personal assistant for your trading account.

Passive trading works for all kinds of assets and experience levels. It can also be long or short-term – thanks to the technology available today. By relying on automation or sticking to straightforward, consistent strategies, you can trade smarter, not harder, and still meet your financial goals. 

Popular Passive Trading Strategies

Now we’ve covered the basics, let’s discover some of the most common passive trading strategies.

Buy-and-Hold Strategy

The’ buy-and-hold’ strategy is perhaps the most popular passive trading approach. It involves holding assets for years – focusing on building wealth gradually. For instance, an investor might buy a company’s stock, expecting its price to increase as the firm grows.

Here’s an example:

• One of the blue-chip stocks of today, Apple, has experienced significant growth over the years.
• When Apple launched the iPhone in 2007, its stock was valued at around $6 per share.
• By 2024, Apple’s stock price had surged to over $230 per share, representing a growth of more than 3,700%.
• This illustrates how holding onto Apple stock through its product innovations and market expansions yielded substantial long-term returns for passive traders.

Similarly, crypto investors also follow the buy-and-hold strategy. This is because BTC has seen impressive growth since its inception.

• In 2010, BTC was valued at less than $0.01 per coin.
• By 2024, BTC’s value has soared to over $90,000 per coin, reflecting a growth of over 900,000%.
• Despite the volatility and price fluctuations, long-term BTC holders have seen extraordinary returns, demonstrating the potential of passive trading.

The key benefit of the buy-and-hold strategy is its low-maintenance nature. Once the assets are purchased, there’s no need for frequent trading decisions or adjustments. This approach also avoids the risks of timing the market.

Instead, it focuses on the broader market direction rather than responding to short-term price movements. While it may not offer the quick profits of active trading, buy-and-hold can achieve consistent, long-term growth with minimal effort. This is, of course, with the right market conditions.

Mutual Funds

Mutual funds have also gained attention as a passive trading tool. They essentially gather money from various investors to create a diversified portfolio. It could be stocks, bonds, commodities, or other securities. Each investor holds a stake in the fund, representing a fraction of its total assets.

By holding a broad array of securities, mutual funds help mitigate the risks of owning individual stocks or bonds.

One key advantage of mutual funds is diversification. By investing in a wide range of securities, mutual funds help reduce the risk of holding individual stocks or bonds.

• For example, instead of purchasing a single stock, an investor in a mutual fund might own shares in dozens or hundreds of companies.
• This spreads the risk across many sectors.
• It can thus help protect the investor from significant losses if one particular stock or sector underperforms.

Mutual funds are run by professionals who make investment choices based on the fund’s goals and strategies. This gives investors the benefit of expert management and oversight they might not have on their own. Plus, there are various types of mutual funds available – such as:

• Actively Managed Funds – where managers actively select securities to outperform the market.
• Passively Managed Funds – such as index funds, which track a specific market index like the S&P 500 or the FTSE 100.

Additionally, mutual funds are highly liquid. Meaning, you can trade them on any business day at the current price. They’re also a great option for investors of all experience levels, with different funds available to match your risk, goals, and time horizon.

While mutual funds offer many benefits, they also come with fees. This includes management fees, which are charged regardless of the fund’s performance. Therefore, investors should carefully consider fees when choosing a fund to ensure it aligns with their financial goals.

Dollar-Cost Averaging (DCA)

DCA is a simple yet effective passive trading strategy involving regular investing at fixed amounts. And the key is to make investments regardless of the asset’s price. Instead of trying to time the market, DCA takes the guesswork out of investing by spreading out purchases over time.

This technique smooths out the impact of market volatility. It allows you to invest more when prices are low and less when they’re high.

For example, suppose you decide to invest $500 in ETH every month.

• Whether ETH’s price is $2,000 or $3,000, you’ll continue to invest the same amount each month.
• In months when ETH’s price drops, your $500 will buy more ETH, and in months when the price rises, you’ll buy less.

Suppose ETH fluctuates its price as follows:

• January – ETH is priced at $3,000 per coin. Your $500 buys 0.1667 ETH.
• February – ETH drops to $2,500 per coin. Your $500 buys 0.2 ETH.
• March – ETH rises to $3,500 per coin. Your $500 buys 0.1429 ETH.

After three months, you’ve invested $1,500 and accumulated 0.5096 ETH. The average price per ETH  for these three purchases is around $2,942.57. This is lower than purchasing all ETH at once when the price was initially at $3,000 per ETH.

DCA, as a passive strategy, is especially useful for markets prone to sudden swings, like crypto or stocks. This way, traders can stay invested over the long term without worrying about market timing.

Copy Trading 

If you’re looking to benefit from the experience and expertise of professionals, then copy trading is also worth considering. It simply means you’ll be copying the positions opened by others. As with all passive trading strategies, this is also a great choice for those lacking time to actively trade.

Many platforms offer social trading features where you can browse the performance of professional traders, review their strategies, and automatically replicate their positions. For example, let’s say a highly-rated trader on a brokerage platform has a track record of 20% annual returns.

If you allocate $1,000 to copy this trader, whenever they buy or sell an asset, the same trades are mirrored in your account proportionally. If they invest 10% of their portfolio in BTC, $100 of your funds will also be allocated to BTC.

Alternatively, you can also copy the best trading bots. Here, instead of copying individual traders, you’ll replicate backtested algorithms. For instance, if the bot identifies a bullish trend in ETH, it generates a buy signal for ETH. And it will be executed in your account – without manual intervention.

Copy trading saves time and gives you exposure to a professional trading skillset. You can choose to copy multiple traders and bots simultaneously – increasing your portfolio’s diversity.

Trading Bots for Passive Trading

As mentioned, trading bots have emerged as cornerstones for passive trading. These software programs interact with the financial markets and execute trades automatically. They are designed with algorithms that scrutinize the market and spot trading opportunities.

Bots come with preset strategies – while some providers also provide customization. Unlike manual trading, where decisions are often influenced by emotions, bots rely purely on logic, strategy, and predefined parameters.

In fact, the concept of trading bots isn’t new – they’ve been used in traditional financial markets for decades. However, their adoption has surged recently, especially among retail traders.

Trading bots for passive trading provide the following advantages:

• 24/7 Market Monitoring – Financial markets rarely sleep. Trading bots monitor the markets around the clock, ensuring no opportunity is missed while you focus on other priorities.
• Access to Short-term Strategies – Unlike traditional passive trading strategies, such as DCA, trading bots also let you set up short-term approaches. For instance, there are bots for grid trading, martingale, and swing strategies suitable for fluctuating markets.
• Customizable Strategies – Many bots allow users to tweak parameters, backtest strategies, and tailor their approach to suit specific goals, making them highly versatile for both beginners and experts.
• Efficiency and Speed – Bots can execute trades swiftly, far faster than any human could. This is paramount in volatile markets where timing is everything.
• Scalability – With a bot, managing multiple accounts or portfolios across different exchanges becomes seamless and efficient. This also lets you diversify into different assets with ease.

With these features, automated bots are undeniably one of the best ways to benefit from passive trading.

Benefits of Passive Trading

By now, you have a solid idea of how passive trading works. Now let’s explore why passive strategies appeal to many.

Less Time-Consuming

Perhaps the biggest advantage of passive trading is the time it saves. Active traders must stay glued to their screens – constantly analyzing charts, trends, and news to make split-second decisions.

Passive trading, on the other hand, involves setting up automated strategies, like using trading bots or algorithms, that execute trades based on predefined criteria.

This means you can make your trades and step away from the market. There is no need to worry about missing opportunities or reacting to every price movement.

Reduces Emotional Stress

Active trading can be emotionally draining, especially in highly volatile markets. The constant ups and downs, fear of missing out (FOMO), and the temptation to react to every market change can be stressful. Not only that, it also leads to poor decision-making.

Passive trading, however, helps sidestep these emotional rollercoasters. Many passive investing approaches stick to long-term strategies that minimize the need for constant monitoring.

Additionally, tools like algo trading bots can further reduce emotional stress by automating trades based on predetermined rules. With passive trading, you can avoid the anxiety of market timing.

Simplifies Decision Making 

Passive trading is simple. It allows you to build a portfolio without getting bogged down in complex decisions. You needn’t constantly track the market or adjust your strategy based on the latest news or trends.

Passive trading strategies tend to be straightforward – be it automated trading bots or investing in mutual funds. Once set up, they require minimal intervention.

Improved Risk Management

Passive trading encourages diversification, which helps spread risk across multiple assets. Instead of putting all your money into one stock or crypto, you can invest in a range of markets. This could be done through mutual funds, ETFs, or a diversified portfolio managed by a trading bot.

Moreover, with trading bots, you can also automate trailing orders for stop-loss and take-profit. This ensures that you gain from favorable market movements and lessen the impact of losses.

• For example, support the bot sets a trailing stop-loss at 10%.
• The bot will automatically sell your position if the asset’s price falls by 10% from its peak.
• However, the stop-loss position will adjust if the position value rises.
• This protects your profits without requiring constant monitoring.

Crucially, diversification combined with automated tools enhances the overall stability of your portfolio.

Suitable for All Experience Levels 

Passive trading is also ideal for beginners who may not have the knowledge or experience to actively trade. With automated tools and pre-designed strategies, even novice traders can enter the market and benefit from the same opportunities as experienced traders.

Not only that, passive trading can also be suitable for professionals. They can automate their own strategies or invest in assets with a long-term approach.

Works Across Diverse Assets 

Passive trading is also versatile – it works across various assets. Whether you’re trading stocks, crypto, forex, or commodities, passive strategies can be applied effectively. For instance, DCA can build positions in blue-chip stocks like Apple or Amazon, cryptos like ETH, or even gold ETFs.

Similarly, copy trading platforms allow you to replicate the trades of seasoned investors or trading bots across multiple markets, enabling you to diversify without managing each asset individually. This flexibility ensures you aren’t limited to one type of market or instrument.

Limitations of Passive Trading 

While passive trading has many benefits, it isn’t without its limitations. Consider the following drawbacks before adopting a passive approach to the financial markets.

Lack of Flexibility

Passive trading often involves sticking to pre-determined strategies, which may not adapt quickly to sudden market shifts. For instance, a buy-and-hold approach could result in missed opportunities during short-term price surges or downturns.

Similarly, a trading bot using a single strategy for a sideways market might fail in a trending one. Unlike active traders, passive traders may struggle to adapt their strategies quickly to navigate volatile markets.

Dependency on Asset Managers and Trading Algorithms 

Passive trading often relies on external tools like trading bots, third-party asset managers, or brokers. While these tools and services offer convenience and automation, they come with risks. For instance, a poorly optimized algorithm or incorrect settings may result in significant losses. This can happen particularly during unpredictable market events or extreme volatility.

Similarly, reliance on brokers or third-party platforms introduces another layer of dependency. Delays in trade execution, high transaction fees, or sudden policy changes by brokers can negatively impact performance. While these systems aim to simplify trading, over-reliance on them means traders must trust their tools and service providers. This leaves you vulnerable to external issues beyond your control.

Limited Strategy Control 

Many passive trading strategies also rely on predefined rules – such as DCA, buy-and-hold, or predefined algorithms. This means traders often have limited control over individual trades.

This can be frustrating for those who prefer a hands-on approach. Additionally, you might be unable to pivot your strategy quickly in response to market news or trends.

Potentially Lower Returns With Long-Term Strategies

As noted, passive trading has many approaches. However, if you’re focused on long-term growth – outperforming the market benchmark isn’t always easy.

While it can be safer, passive trading might yield lower returns than active strategies that aggressively exploit market fluctuations.

Is Passive Trading Right For You?

Choosing between passive and active trading can be confusing. Check out the following points to decide which option best suits your needs.

Time Commitment

• Passive Trading – Designed for those with limited time. Strategies like DCA or automated trading bots take care of market participation, allowing you to focus on other priorities.
• Active Trading –  Requires a significant time investment involving constant market monitoring, analysis, and decision-making to capitalize on short-term price movements.

Stress Levels

• Passive Trading –  Reduces emotional strain by relying on predefined strategies and automation. This approach minimizes reactionary decisions during market volatility.
• Active Trading – Can be highly stressful, as traders must navigate rapid market changes and often deal with FOMO and emotional decision-making.

Skill Requirement

• Passive Trading – Suitable for beginners or those without in-depth market knowledge.
• Active Trading – Demands a solid understanding of technical analysis, market trends, and fast decision-making, making it more suited for experienced traders.

Risk Management

• Passive Trading – Emphasizes diversification across various assets, reducing overall risk. Approaches like mutual funds or ETFs spread investments across multiple sectors.
• Active Trading – Focuses on maximizing returns but often involves concentrated investments, which can increase risk if the market turns unfavorable.

How to Choose the Right Broker for Passive Trading 

If you think passive trading is the right option, it’s time to check out suitable brokers.

Here are some key points to consider.

Assess Your Needs

Start by refining your objectives.

• Are you focused on building a diversified portfolio or trading specific assets like crypto, stocks, or forex?
• Do you want to leverage trading bots, use copy trading features, or automate long-term investment strategies like DCA?

Knowing your goals will help you hone in on brokers that align with your needs.

Evaluate Supported Assets and Markets

Different platforms cater to specific markets. If you’re into crypto, you can look for exchanges. For stock or ETF trading, seek platforms integrated with brokerage accounts that offer passive investment features.

If you want to build a diversified portfolio, it’s smart to choose a broker that supports multiple assets. This lets you manage all your investments from one place.

Automation Features and Tools

Automation is at the heart of passive trading. Look for platforms offering robust automation tools, such as:

• Support for trading bots or signals
• Trailing orders
• Backtesting tools
• Demo accounts

These features increase the versatility of your passive trading approaches. If the broker can directly integrate these tools, you won’t need to rely on third-party providers.

Pricing and Fees

Fees can significantly impact your profits, especially in passive trading, where positions accumulate over time. Compare subscription costs, commissions, and funding charges.

Security and Reliability

Trading platforms handle your funds and sensitive data, so security is paramount. Look for platforms regulated by financial bodies – which adds credibility and reduces risks.

Additionally, check reviews or uptime histories to ensure the platform is reliable and not prone to crashes or glitches.

Customer Support and Resources

Reliable customer support can save you time and reduce frustration. Brokers offering 24/7 live chat or prompt email responses are preferable.

Additionally, educational resources like tutorials, guides, and webinars can be invaluable, particularly for traders new to passive strategies.

Conclusion 

Passive trading offers many benefits – from saving time and reducing emotional stress to improving risk management practices.  It also provides a better long-term growth potential. Crucially, passive trading appeals to beginners, busy professionals, and those seeking a more hands-off approach.

With tools like trading bots, you can automate your passive strategy. Algobot offers a plug-and-play framework, with support for all leading brokers and exchanges. This means you can sit back and allow Algobot’s AI algorithm to trade on your behalf.

FAQs

How does passive trading differ from active trading?

Active trading requires ongoing market monitoring and decision-making. On the other hand, passive trading is more about setting strategies and allowing them to unfold over time.

Can I use trading bots for passive trading?

Yes, bots are widely used for passive trading as they automate positions based on preset rules. They monitor the market 24/7, ensuring opportunities aren’t missed while you remain hands-off.

What are the risks of passive trading?

While passive trading minimizes the time commitment, it still carries market risks, as no strategy is foolproof. The primary risk is that market conditions can change unexpectedly, affecting long-term returns.

Is passive trading suitable for beginners?

Yes, passive trading is ideal for beginners since it requires minimal market knowledge and doesn’t demand constant attention. With the right tools, even newcomers can implement effective strategies with ease.

What is the simplest passive investing strategy?

The simplest passive investing strategy is DCA. In this strategy, you invest a set amount of money at regular intervals, irrespective of market conditions.