If you really want to know best trading Strategy in Indian stock market than first you need to have the basic understanding about the types of trading happens in stock market. Any individual trader or investor who wish to enter this zestful world of stock trading must have knowledge of different trading styles. So that later he/she can develop his own trading strategies.
As a matter of fact every trading style has its own advantages and drawbacks. For example, if you want to create long term wealth, you can choose long term investments strategies(fundamental or positional trading). In similar manner, if you wish to make some quick money, then opt for short term trading like , intraday, swing trading, scalping etc.
Therefore, before you choose a type of trading style, you must have thorough understanding. After all, it’s about your hard earned money, which you will be using in share market. Hence it becomes important to educate yourself about it.
As a beginner or a newbie, it becomes really essential for you to learn the basics and types of Stock trading that exist in the stock market. Hence today in this blog we will be going through types of trading styles and strategies involved in Indian stock market.
Once you educate yourself about this strategies, you can analyse your financial goals and the types of trading suits you best and than gradually apply this strategies while trading or investing.
Just to let you know the post will be little longer than usual so have patience. also you can move from table of contents above.
Let’s learn some of the most popular stock trading styles first and than best trading strategies you can adopt out of them.
Best Trading Strategy In Indian Stock Market:
Intraday Trading or Day Trading Strategy:
In intraday trading or day trading, the trader buys or sells the stock on the same day. In stock market if you buy or sell shares or other financial instruments within the day, it is termed as intraday trading or day trading.
The basic intention of a trader is to benefit from the movements made by a stock within market hours in a day. Day trading is most commonly practiced among retail traders in the Indian stock market.
One can hold the stocks for few hours or few seconds and multiple number of times in a single day. These kinds of traders do not hold their trades overnight. Because of high volatility as a trader one need to be more disciplined and quick decision maker. Intraday trading involves taking on additional leverage to generate higher returns.
If you are a person who is ready to invest his time, energy & money than intraday trading can be done. Another key point is, you have to watch the market and time your trades to perfection.
Secondly, you need to have a good understanding technical analysis on daily charts to make the right decisions. Day traders typically use 1 minute, 5 minute ,15, 30, 60-minute intraday charts while trading. Stock selection is most important part in intraday trading so you have to choose stock very wisely.
Points to keep in mind while doing intraday trading:
First thing to remember when you execute any day trade you choose MIS (Margin Intraday Square up) it means that whether you have profit or loss it will get squared off within market hours. In intraday trades, you need to square-off your position before the market closes. So, it is very important that you choose stocks that have enough liquidity for executing such trades.
As intraday trading is highly risky it’s better to be prepared. You can use stop-loss to restrict your losses. Stop loss is nothing but the target price for booking losses, if trade does not move in your direction.
This is why many recommend high liquid stocks for intraday trading. As a matter of fact traders also do intraday trading or day trading in Futures & Option.
Always choose less volatile and liquid stocks for trading in intraday. First thing to remember a high volatile stocks can trigger your Stop Loss easily, so try to avoid them. Also check the volume as it add substantial movement in the security.
Intraday trading is very stressful to manage Because, it needs dedicated focus and attention with awareness. Please Avoid trading on speculations it is our humble request to all traders.
To be at the better position I would advise you to do paper trading practice or virtual trading. There are many online trading platform, where you can do trading with virtual money.
For ex Moneybhai by moneycontrol. If you get success in this then you can surely proceed to day trading with actual money. This process of paper trading practice will help you need to know how real time stock market works.
It is very important to realize day trading is not overnight quick rich scheme. Never think to generate big profits in single trade based on some tips.
Day trading requires extensive research, dedication and experience, it is not one day course. “There is nothing called as Free Lunch in this World”. If you are thinking to earning profits without any efforts then day trading is not for you.
Swing Trading or Short-Term Trading Strategy:
Swing traders or short-term traders are those who hold their position for more than one day. As an intraday trader, most of the time during the trading session, you might feel that this stock does not move to your expectation in a given period of time.
Moreover, you have to square-off your position before trading session ends. At the same time you think that this stock has the potential to pace up the momentum in upcoming days This is where role of swing traders comes in picture.
Generally, Swing Trading positions typically last two to five days, but may last as long as one to two weeks as well. The main difference between day traders and swing traders is the time frame of holding any securities.
As a swing trader you should be aware of charting techniques, understanding different technical indicators as well as candlestick charts. This is because a proper research is much needed to know the correct trend in the market.
Suppose, if the security is in an uptrend, the online trader can “go long” on that security by buying shares, call options, or futures contracts.
On the other hand if the overall trend is down, then the trader could short shares or futures contracts or buy put options.
I must also tell you that you will require more capital to be a swing trader in comparison to intraday trading because of overnight trades require more margins.
Methods of Swing Trading Strategy:
Buy Today Sell Tomorrow (BTST) Trading Strategy:
In this type of trading, you buy shares of a stock today and sell tomorrow. Which means people buy shares today in anticipation that price will go up the next day. The next day when the market opens, the trader sells his shares and makes a profit.
In BTST, you do not get the delivery of shares. This is because stock market in India works on T+2 settlement cycle. The shares you buy in form of delivery gets credited to your demat account after T(trading day +2) days.
There is a difference between delivery trading and BTST. In delivery trading, you get the delivery of stocks to your demat account. Once you get the delivery, only then you can sell the stocks. But what if there is a big opportunity that exists before you get the delivery? Then the role of BTST comes into the picture.
In BTST trading style, you can buy shares and sell them tomorrow even without having a delivery. An advantage of BTST is that you don’t have to pay any DP charges.
Sell Today Buy Tomorrow (STBT) Trading Strategy:
This trading style is exactly opposite of BTST. Here you can sell today and buy tomorrow. But this type of trading is not allowed in equity trading. However, it can be done in the derivatives market.
In this style, the trader enters into a short sell first (sells). He then carries forward his short sell position to the next day and squares it off by buying. In other words, the trader here expects the market to be bearish. Therefore, he taps the opportunity and earns a profit.
In simple words, in STBT, a trader sells some asset class future and again buys it as the market opens on the next day.
One can do swing trades even in case of some geopolitical event, any news related to policies or management changes of a particular company.
There are swing trading opportunities in this cases too. Sometime the trader taking a long position near the support area and taking a short position near the resistance area to take advantage of fluke in price can be termed as swing trading as well.
Positional Trading or Buy and Hold Strategy:
Positional trading also known as ‘Buy and Hold‘ is kind of trading strategy in which, traders can hold the position for a number of days as per the requirement. In such methodology trader can open a position for a few days, for few months or for few years.
Delivery trading is also known as positional trading. In this type of trading, the trader keeps a long term horizon. Meaning, the trader buys and holds the stocks for longer period of time. It can be for weeks or even months.
However one of the biggest challenge in delivery trading is to identify multi-bagger stocks with large price movement.
Buy and Hold is a strategy where the trader seeks to buy securities based on substantial fundamental research. Moreover, one also looks at technical trends and indicators suggesting probability of a large price movement.
Instead of trading you can name it as investing as the position you are taking aims for big target for the long period of time. It is up to you to decide your investment capacity. Positional trading is less risky compare to swing or intraday trading. Not to mention you need to do lot of study before you invest.
Whether you are a normal working professional or owner of business, this trading style is most suitable. You do not need to keep a track of your portfolio or stocks on regular basis.
As a matter of fact, swing trading and position trading are the only two types of trading in which a person with a full-time job can still consistently trade well.
Once the investment is done, you can avoid the little fluctuations and focus more on considerable gains for Long-term. No matter what style you choose, you have to make sure that it is truly fits your personality.
One more thing to remember is patience, there’s nothing wrong with waiting for an right opportunity.
Fundamental Trading Strategy:
Fundamental trading strategy focuses more on company-specific data to determine which stock to buy and when to buy it. To put this in perspective, Do not go by the name of the company or industry better to know how its performing.
For example, What exactly they manufacture? Number of countries they operate in, Know about their flagship product, peers or the competitors of the business in that sector etc. Check out their balance sheet with revenues. Going with crowd is not always the best decision especially in stock market.
As rightly said “Never invest in a stock. Invest in a business instead”.
When one invest proper research has to be done. But what is there to research, answer is many. Therefore few very important points that you need to know i have listed below:
- Owner of the company (CEO), Management
- Business Model it works on
- Competitive Advantage from its peers or competitors
- Price-to-Earnings Ratio (P/E)
- Debt-to-Equity Ratio
- Net Income
- Profit Margin, low profit margin can be translated as company’s profitability is not very convincing.
- Revenue growth
- Dividends does company pays any if yes than how much
- Beta of that company
When you buy share in any company simultaneously you become owner of that company by percentage of shares you own. Now it is up to you to decide what kind of business you think would succeed in future. Instead of going on blind date, if you know some one prior you would have much better chance of building that relationship.
For example, the release of a company quarterly financial statements can provide better insight into whether or not the firm is improving its financial health or position in the marketplace.
On the other hand, a press release announcing bad news about the company revenues could change the fundamentals for short-term leading to dragging of shares.
While trading on fundamentals can be seen as form of both short-term and long-term perspectives, fundamental analysis is often more closely associated with the buy-and-hold or positional strategy of investing. The stock prices are predicted keeping in mind the company, industry and economic statistics.
Fundamental trading is based on logic and facts hence. No-doubt interpreting those facts requires intensive, research and effort. However, you can easily do that if you read good articles, newspaper, watching television channels based on market research.
Every company listed on NSE OR BSE shares there results or annual report about there business vision and what they have achieved during financial year.
Scalping or Micro Trading Strategy:
Scalping or Micro Trading is a strategy where one hold the position for a few seconds to a few minutes at the most. The main objective of a scalper is to grab small amount of profit as many times as possible throughout the trading session in a day.
Micro trading means when one trade keeping focus on very small changes in a stock price. It can be even difference between changes in a security’s bid-ask spread.
Micro trading is known as taking very small profits, repeatedly and continuously. Generally, this trades will last from seconds to minutes. Traders implement this strategy as capturing small moves in stock prices are easier than large ones.
They will place anywhere from 10 to a few hundred trades in a single day. This can be done with the help of minutes and hourly charting. One can utilize one-minute to 30 minute charts with technical indicators to know trend and momentum in a stock.
Scalping is also known as high-frequency trading which is all about speed with accuracy. This type of traders is looking to make the smallest profits per trade and do hundreds or thousands of transactions in a day.
This does require you to have a fast system displaying prices at the real time. Majorly institutions and hedge funds compete in this type of trade setup. Because of the recent development in technology one can make their trades fully automated.
Scalp trades can be executed on both long and short sides. They can be done on breakouts or in range-bound trading. This is a fast-paced and exciting way to trade, but it can be risky.
As a beginner or a newbie in stock market i would not recommend you to go with this until you have implemented other trading strategies mentioned above.
Arbitrage Trading Strategy:
Arbitrage traders simultaneously purchase and sell assets to earn profit from price differences of alike or similar financial instruments, on different markets.
To put it differently arbitrage is the strategy of taking advantage of price differences in different markets for the same asset. Arbitrageurs purchases an asset in the market where the price is lower and simultaneously selling the asset in the market where the asset’s price is higher.
For example, if a stock is trading on multiple exchanges and is less expensive on one exchange, it can be bought on the first exchange at the lower price and sold on the other exchange at the higher price.
Let’s say an individual owns stock in Company ABC, listed on National Stock Exchange(NSE), that is trading at Rs.100. At the same time, the ABC stock listed on the Bombay Stock Exchange(BSE) is trading at Rs.101. A trader could purchase shares on the NSE for 100 and sell shares on the BSE for 101. This would give him a profit of Rs.1 per share.
It may sounds simple enough, but given the advancement in technology, it has become extremely difficult to profit from mispricing in the market. You need to have computerized trading systems to monitor fluctuations in similar financial instruments across multiple exchanges.
Arbitrage trading tends to work best for traders who are able to automate their trading. If you are comfortable with programming and relying on software to do your work, arbitrage may be a great strategy for you.
Arbitrage is done by big hedge funds and institutional traders as it requires great network speed and does not require technical or fundamental analysis skills.
Event Based Trading Strategy:
This type of trading is purely based on prominent events occurring related to good earnings results of companies, change in government policies, geopolitical events, mergers & acquisitions, company restructuring, one time dividends, natural calamities, new innovations and technology etc.
The concept in this kind of trading is to identify trading opportunities based on events. As an event trader you do need to have a fair understanding on fundamentals and technical analysis.
This analysis will help you to place your trades better and more logical in comparison to reacting just to the event. If you like doing research and wait for such changing opportunities, then you should look for this type of strategy.
How To Apply This Best Trading Strategy In Indian Stock Market:
Great, now that you know the different trading styles and methods happens in stock market it’s time to know how to implement them practically in live market. For this I would request you to choose any one trading method which suits your psychology or mind.
So, suppose you want to do intraday trading, as have already told you above to choose less volatile stocks and more liquid. When i say less volatile i mean that stock which respects its support and resistance levels, does not make sudden move(up/down), usually those stocks which are listed in FNO have good volatility range.
Now once the stock is selected we have to do certain technical analysis, keep in mind with tips and shortcuts you may make few bucks for one or 2 days but if you are really serious about making money from stock market than you have to learn this different analysis, there is no other option.
If you are the one who doesn’t want to learn this you can simply opt for stock recommendations service from a well organized company such as 5Paisa, which is very much reliable in comparison to many other so called stock advisory companies .
Now, coming back to the implementation process, we have chosen the stock to trade, now below are the list of things you need to do before making that trade.
- Understand the support and resistance zones, pivot points and learn how to find it correctly on chart.
- Learn the basics of charts and candlestick patterns, this is very much important to know when to enter and exit in a trade.
- You should be aware about the moving averages to know whether the stock is in upper range or lower.
- Use technical indicator such as MACD or Bollinger Band, there are many but learn and try to implement at least one of them.
- Get yourself aware about volumes, as you should trade when volumes are higher for both buy/sell.
- Place the trade, put the stop-loss and relax, even if it goes against you as this will happen. Learn from the losing or winning trades both.
Whether you like it or not but if you do not want to be rely on anyone than you should have at least basic understanding of all things mentioned above. There is no other way, if you want to trade by yourself and earn living out of trading.
Yes, there are companies, websites which do give you the recommendation but you have to spend money, now it’s totally up to you to decide.
If you’re looking to leave your day job and start day trading for a living, then you’ve got a challenging but exciting journey ahead for you. Before you do so you need to keep in mind that it requires lot of time and energy to build strategies working in your favor. Moreover you need to have effective risk and money management strategies as well.
It may happen that none of these trading strategies fit for your personality. Do not lose hope there are lots of other strategies to look for, and with just a little research you may be able to find a strategy that is a perfect fit for you.
But implementing them requires discipline and a firm grasp on your emotions. It is also heavily dependent on your psychology. To become successful you will need to prioritize a style according to how your mind works.
If you are a newbie, think of trading and investing please work with small amounts initially and don’t take bigger risks with your hard earned money.
Do read this amazing stock market guide designed specifically for beginners to clear the concepts in easy language.
At the end of the day your profits will depend highly on the strategies your apply in market. For instance, A trader who has a mind-set of generating fixed returns will do better in options trading than in swing trading strategies and vice versa.
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Note: Please do not take this as any recommendation, to trade or invest. This is just for reference, to make you understand more about the Dow Theory and its importance, under no circumstances intended to be used or considered as financial or investment advice, a recommendation or an offer to sell, or a solicitation of any offer to buy any securities or other form of financial asset.
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