Short-term trading refers to the trading strategies adopted in the stock market for opening and closing a position which may range between q few minutes to several days or weeks. A stock market trader may follow any of the following trading styles listed below.
Styles of Trading
- Intraday Trading
- Buy Today Sell Tomorrow & Sell Today and Buy Tomorrow (BTST & STBT)
- Swing Trading
- Positional Trading
- Mechanical Trading
Intraday/ Day Trading
Intraday/ Day trading means buying and selling of stocks on the same day in the Indian Stock market between 9:15 AM to 3:30 PM. The trader may open and close a position in a security on the same trading day. It may be either buying first and selling later (long) or selling first and buying later (short) irrespective of profit or loss. Small jumps in the stock price can give quick profit but any adverse movement will lead to a big loss.
Example of day trading:
Mr. Ajay, a trader bought 100 shares @ 226.20 per share of ICICI bank on Monday morning when the market opened at 9:15 AM. During the day as the prices were fluctuating, Mr. Ajay was able to sell these 100 shares@ at Rs 229.70 per share at 11:45 AM. So he made a gain of Rs 3.50/- per share and the total profit excluding brokerage was Rs 350/-. In this example Ajay bought and sold shares on the same day, hence it is termed as Intraday or Day trading.
Merits of Intraday trading
- No overnight risk in day trading.
- A small jump in stock price leads to quick profit (as brokers allow leveraging).
- Commission & brokerage are relatively less.
De-Merits of Intraday trading
- Constant monitoring of ‘securities traded’ is required.
- Small adverse movements can result in a big loss.
- High volatility of the market creates uneasiness to normal traders.
Buy Today And Sell Tomorrow Or Sell Today Buy Tomorrow (BTST & STBT)
BTST: BTST stands for Buy Today and Sell Tomorrow.As the name says the stocks are bought first and sold on the next day.
STBT: STBT stands for Sell Today and Buy Tomorrow. This is the opposite of BTST. Here stocks are sold first and bought the very next day. But STBT is not allowed in equity shares.
Example of BTST:
Ms. Shanthi buys 200 shares of TCS on Wednesday @Rs 2496.00 per share at 3:15 PM and sells the same on Thursday @ Rs 2533.70 per share at 9:35 AM. Ms. Shanthi has made a profit of Rs 37.70 per share and a total profit of Rs 7540/-, excluding brokerage.
Merits of BTST & STBT
- Captures quick Gap up or Gap down.
- Squaring off Non-intraday trading.
- No Constant watch.
De-Merits of BTST & STBT
- Unpredictable overnight adverse events.
- High risk or a big loss, if stock price not in favor due to above.
- More brokerage cost.
Swing trading refers to the style of trading where the trader holds the stock for 2-5 days (or position closed the next day if the swing forms early). Usually stock doesn’t move in a single straight line, it moves live by taking a breath (inhale and exhale). The traders make a profit by buying at the swing low and selling at the swing high (long position) or selling at the swing high and then buying back at the swing low (short position). This is best suited to capture the ups and downs of the same stock.
Example of swing trade:
Mr. Raju Bought 1000 shares @ Rs 942.80 of Yes Bank on Monday and sold on Thursday @ Rs 962.70. Mr. Raju gained a profit of Rs 19.90/- per share and a total profit of Rs 19,900/- excluding brokerage.
Merits of Swing Trading
- More profitable than Intraday trading.
- Profitable as both side trends captured.
- Safer than positional Trading.
De-Merits of Swing Trading
- Capital is blocked for a few days.
- Swing need not be in favorable trend to the trader.
- Profit cannot be encashed quickly as compared to Day Trading.
Positional Trading refers to the holding of the securities usually with a trading range from one week to three months, wherein the ‘swing low to swing high’ and ‘swing high to swing low’ is captured.
Example of Positional Trade:
Ms. Anita bought 500 shares of Infosys Limited @ Rs 1073/- per share in February end. She held the stocks for a few weeks and sold them in April's first week at Rs 1227/- per share. Ms. Anita gained a profit of Rs 154/- per share and a total profit of Rs 77000/-, excluding brokerage charges.
Merits of Positional Trading
- More profitable in case of strong trends.
- The risk is relatively low.
- Traders with alternative jobs can trade at ease.
De-Merits of Positional Trading
- Huge capital is required.
- Requires more technical analysis.
- Deeper Stop loss can result in huge risk.
Mechanical Trading refers to stock trading with strict rules and backtesting. It is nothing but swing trading with set buys and set signals. Once we achieve profit equivalent to one more lot, we reinvest the same with one more lot. Here the power of compounding will kick in will result in a huge profit in One and half years to two years.
Merits of Mechanical Trading
- Power of compound.
- Avoids psychological stress as we will take back original investment quickly and trade in market money.
- Deep and strong understanding of market movement.
De-Merits of Mechanical Trading
- Needs lots of practice.
- Brokerage & commission will be more.
- Trading wrongly will result in loss of capital.