Every market participant is faced with the question of whether he should be an investor or a trader. Since investing generally requires a good knowledge of finance and takes years before the fruits are visible, most newcomers naturally drift towards online trading. But when they elect to side with trading they are generally amazed by the options available to them. Technical analysis, because it is pictorial in nature is easier to grasp than fundamental analysis.
An old adage that goes in the market is to trade one’s personality, unfortunately, this is the first problem that the trader encounters. Not everyone can trade on an intra-day basis. Same too is the case with any other form of trading.
In order to be a successful trader, one has to be comfortable with the work he is doing and that can happen only if he is trading in his comfort zone. Just like in cricket, not every batsman is fit for the shorter version of the game, some are test players, same is the case with trading.
Also Read: Trading Types
Trading is classified not only in terms of time frame but also in terms of technique and objectives.
In terms of time frame trading is classified as intra-day, short-term trading and long-term trading.
In terms of techniques, trading could be trend following, mean reversal, price action trading, patterns among others.
In terms of objective trading can be capital protection through arbitrage, capital gains or fee generation through market making.
The good part is that the techniques and objectives can be used in all time zones.
We shall now look at trading in various time frames.
Intra-day trading: In this form of trading the position taken by the trader has to be closed on the same day. Intra-day traders hold on to a position from a few seconds to hours. All forms of techniques like trend following, price action, mean reversal are used by intra-day traders in order to attempt to profit from it.
Those traders with an ability to take decisions on the feet and can handle volatility without getting perturbed are best suited for this kind of trading. At the same time such traders need to follow risk management come what may as they will have a very small reaction time.
In this form of trading gains are limited but so is the risk. An advantage the intraday trader has is that he gets a huge leverage on the capital he deploys. But this is a double-edged sword as the chances of a huge loss is also high.
Short-term trading: In this form of trading, position is held for a period of a few weeks to few days. Again all form of techniques is valid in this time frame.
Swing trading has off-late become the most common form of short-term trading where a correction in a trend is used to trade in the direction of the trend.
The trader has the advantage of leverage which is much smaller than that of the intra-day trader but his reward and risk are higher on each trade that he takes.
Traders who are comfortable with lesser volatility but at the same time are risk averse prefer this form of trading.
Long-term trading: Here the trader tends to hold the position from a few weeks to a few months. Trend following traders generally use this form of trading but the time frame is easily applicable to all techniques used by traders.
In this form of trading, the leverage is lowest but the risk-reward is the highest.
A patient trader who can hold on to his trade without getting too bogged down by day-to-day price movement prefers this form of trading.
We shall now at the techniques used by traders to profit in any of the time frames.
Trend-following: This form of trading is where the trader enters a trending stock by using any of the strategies which can give him an entry to ride the trend. Moving averages, donchain channels are some of the popular strategies used by trend following traders.
Mean reversal trading: In this case, a trader waits for a stock that is trending or is moving in a range to come back to the mean level before he takes an entry to ride the wave.
Swing trading: This form of trading is similar to mean reversal except that the trader looks to enter stocks which are in momentum. Such traders prefer quick results and the stock to perform fast in their direction or they exit their position.
Pattern trading: Traders of this form wait for well-known patterns to form on the charts to exploit the market. In technical analysis, many repeatedly occurring patterns are defined which a trader picks to trade. These type of trades are generally used by traders of the smaller time frame.
Price Action trading: This form of trading is fast gaining traction where the trader observes the behavior of the price and plans his trade according. This discretionary form of trading is a distant cousin of tape reading where the traders of yesteryears used to read the price (printed on tapes) before taking a position. In this type of trading, the trader looks at various timeframes before entering a trade.
Also Read: Top 5 Technical Analysts of India
Following are the various forms of trading based on objectives:
Capital protection: In this form of trading a trader looks at the price differential of the same stock in various markets. Such types of trades are called arbitrage trades. However, traders are now using a combination of various instruments like cash market, futures, and options to take advantage of mispricing. Here the trader can use various time frames, but such opportunities are generally available in the short time frame.
Capital gain: All trading is for capital gains. Even capital protection traders are in the market for capital gains. What differs is the risk, time frame and the capital one allocates to gain.
Fee generation: This form of trading is generally promoted by companies or exchanges in order to increase volumes of transaction. Market making is a popular form of trading where the trader or the market maker is paid a fixed fee to generate volume.
A new form of online trading that is picking up is news based trading. Here the trader reacts to a news that hits the market, trying to the immediate reaction in the market. This too is a short-term form of trading.
The wide array of possibilities offers opportunities but at the same time confuses wannabe traders.