The world of trading has a lot of variety in terms of opportunities. Due to the vast variety of opportunities that exist in the dynamic mechanism of the stock markets, many different types of trading styles can be applied. It is very important to choose a trading style which suits your personality and preferences. It is also heavily dependent on your psychology. To become successful you will need to prioritize a style according to how your mind works. 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.
There are no Best Types of Trading styles.
Understand your own psychology, and the game will teach you the game.
Choosing from the types of trading styles made easy:
1. Intraday Trading – Most commonly practiced among retail traders in the Indian stock market, positions are squared off before the closing hours of the market. Intraday trading philosophy is that overnight exposure is risky. Traders book profits or losses quickly and do multiple trades every day. It suits people who are least bothered about fundamentals or the things that are considered important to be a successful investor in the long-run. To them, it’s all about money management, timing entries & exits and position sizing appropriately. You can either be jobbing or trading the momentum. Intraday trading involves taking on additional leverage to generate higher returns. They are always looking to make higher ROIs than other trading formats. It is also among the most aggressive types of trading styles. Intraday trading format thrives on high volatility as the number of opportunities go up during such times. A successful intraday trader understands the importance of consistency and the power of compounding returns on a short-term basis. If consistency is maintained, then returns can be compounded on a monthly or quarterly basis. Intraday trading is only suitable for those who can dedicate a fair amount of time tracking the movements of stock markets regularly.
2. Swing Trading – The principal difference between intraday trading and swing trading is the timeframe. Swing traders attempt to predict the short-term fluctuation in stock prices overnight. So positions can last anywhere from 1 day to a few weeks. The leverage used by Swing traders is generally lesser than intraday trading. Due to overnight risk, stockbrokers in India charge SPAN + Exposure margins. In a way, it enables traders more firepower to withstand overnight price movements and hold positions for longer hence trying to book higher profits per trade. Most technical traders and chartists fall in this category. If you like to analyze short-term price movements using technical analysis, then this is your ball game. True swing trading also involves a great deal of money flow analysis. If this is what you like doing then stick to this trading style. It is rewarding and the price movements are more predictable. However, risk management will need to be more sophisticated. In this style, you must be able to ignore minor intraday fluctuations without breaking a sweat or getting worried. However, most swing traders also do intraday trading so it is one style which can be merged but, it is important to draw a line somewhere and focus on specializing in one particular trading style. I must point out that you will require more capital to swing trade in comparison to intraday trading because of diversification and also that overnight trades require more margins. Ideally, you should also keep some buffer capital and not be 100% invested at all times to account for the volatility and avoid margin calls of any sort. To know the exact margins required to trade in derivatives, check out our Margin Calculators.
3. Positional Trading – This is a type of trading style which ignores the minor short-term fluctuations that swing traders are fully focused on. Positional trading involves lesser leverage than swing trading. The holding timeframe of each trade is higher as these traders anticipate a big pice movement in the coming future. Timing the market is not the top priority for this category of traders as they are willing to weather the storm and wait out a few months to see a large gain. Their focus is usually a hybrid of technical and fundamentals. To be able to hold positions for a longer time period, they feel like they have to be sure of what’s happening within the company. They’re usually looking for the underlying stock to gain more than 20% in the near future. Positional traders have the aptitude and inclination to lean more towards investing in the long run. In India, positional traders will either have to trade futures by maintaining a safety margin or invest in equity without leverage. Point to note: It is hard to be short for too long unless futures contracts are rolled over. But it does include a time premium for next month contracts.
4. Options strategies – Is your thought process very objective and mathematical? If you like outcomes to be more defined and measured, then trading options strategies may be your thing. The most difficult part about this is to formulate the strategies. It takes quite some time to become proficient and start making your own strategies and implement them seamlessly which is why there are very few options trading specialists in India. After understanding the crux of the problem, we launched Options Strategies Lab to help traders choose from over 43 different options strategies based on individual market outlook and preferences. It is apt for those traders who are looking to clock a fixed and more predictable rate of annual return. Due to the lack of knowledge and awareness, Indian retail traders are gambling by buying far OTM options in a bait to get outsized returns. Don’t get me wrong, it is possible and many traders have earned exorbitantly high amounts of money doing so (1000% returns in 2 months etc.) but the real question is, is it sustainable? If it is not sustainable then one ought to focus on what can work and what has a higher probability of happening. If you use options strategically, it is very scale able and requires much lesser attention than all other formats of trading primarily because the risk is defined. Learn How to Trade Options the Right Way!
5. Trading based on technical analysis – Almost all kinds of trading activity revolves around technical analysis because of its diversity and different approaches to analyse demand and supply in the stock market. As long as you know how to apply it, you can be a day trader, swing trader or positional trader. The underlying knowledge required is similar. However, it may not be fully relevant in the following trading styles and the concept of analysing opportunities is completely different. Almost all traders including institutional ones, banks etc. use technical analysis skills to gauge market and to foretell the future prospective of the Indian stock market.
6. Trading based on money flows – It is based on FII Inflows, DII flows in and out of stocks, Open Interest analysis, promoter deals, stake sales, gross delivery data, Index rebalancing etc. More often, than not, this data is vital to identify the near term trends in the stock market. Many professional traders give such information first priority and then back it up by technical analysis of stocks and indices. If you are the kind who likes analysing money flows, then this type of trading can be rewarding. Such information is especially useful if you are a swing trader. This information is also useful to analyse the short term sentiment of participants. For instance, advance decline ratios fluctuating before RBI meeting is enough to suggest that this method is very useful in gauging the near term future.
7. Event Based Trading – Trading based on some events that have occurred or ones that are about to occur is a type of trading style in itself. Events can range from good earnings results of companies, change in government policies, geopolitical events, mergers & acquisitions, company restructuring, change in price of raw materials, one time dividends, natural calamities, new innovations etc. The concept in this kind of trading is to identify trading opportunities based on events. It does require a fair understanding on fundamentals and technical analysis. You might wonder how technical analysis is relevant, but I must remind you that stock markets anticipate events before they occur. So suppose an event is already priced in, it’s best to change your stance. Technical analysis helps identify this quite easily. If you like doing research and wait for such game changing opportunities, then you should make it worth it.
8. Quantitative trading – It is often misunderstood as high frequency trading and automated algorithmic trading but in reality it isn’t. Quantitative analysis is analysing stocks based on statistical performance. For instance, if International Energy Agency (IEA) forecasts that the price of Brent Crude Oil will be headed downwards due to the supply glut expected in Saudi Arabia. The quant program analyses historical patterns when such news has occurred and the impact it has had on oil prices and other correlated asset classes and presents it with a risk/reward ratio based probability so that you can take a good trading decisions. Quantitative trading does not necessarily need to be HFT or even algorithmic order execution. It just means that the method of analysing stocks is based on computer models to increase efficiency. It definitely requires knowledge of programming, a good trading capital and computing speed. Most Importantly, the right knowledge of markets to be able to analyse data correctly. No amount of programming will give you the desired results if you lose focus of the markets. It is better to learn about markets thoroughly before you attempt this.
9. Arbitrage Trading – Arbitrage is only reserved for the prop trading firms and institutional traders as it requires great network speed and does not require superior analysis skills. The yield for vanilla arbitrage are not lucrative anymore and strategies have gotten more advanced involving some element of risk. There are many different kinds of risk arbitrage models which can only be exercised by institutions or large traders due to the sheer complexity of information acquisition, and risk management skills. Only enter the field if you’re obsessed with no risk profits. Otherwise, you might get bored soon.
10. High-Frequency Trading – High-frequency trading is all about SPEED. The strategies have all got to do with manipulating bids and offers (Bid/ask) at a rapid pace. This breed is looking to make the smallest profits per trade and do hundreds or thousands of transactions in a day. Currently, institutions and hedge funds compete in this space in the microseconds. As we speak, it has got less to do with brains and more to do with speed so it is not recommended at all. If this is what you want to do, then try starting your own fund or joining one as a programmer. These are fully automated so there is no value for analysis. Only order execution.
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