Share Trading has always been a fascination for all those who have got nerves of steel and volatility is their love. Careless wallets get emptied sooner than later whereas adequate preparations help master the trend, be it short term, intermediate term or long term. Like of the types of trends, the trading can be distinguished in various types. We are going to discuss some types of share trading in the article and depending upon individual’s psychology, one can start trading accordingly. To start share trading you need to first open a demat account and trading account with a stock broker. Share Market keeps on generating small yet frequent inefficiencies which a trader can capture to earn his/her share of flesh.
Depending upon the time frame in which a trader prefers to trade and other crucial parameters, trading can be divided into various types:
Types of trading & which is more beneficial to stock traders?
Momentum trading is a way to ride a short term trend wherein the trend is slightly of longer time frame than swing trading and is usually followed by high volume. Momentum investors aim to capture the waves of enthusiasm that can send stocks blasting higher for extended periods of time. Traders following this approach generally stick to few number of stocks and have primary motive of cutting losses short. While these traders use margin money to improve their profits but sticking to discipline in this type of trading is crucial as the momentum may soon calm down and profits are supposed to be booked prior to the settling down of waves. The key to momentum trading is “act quick and act smart”.
In this type, one chooses a set of stocks and starts tracking them for a breakout or a breakdown. As long as prices are trading in a range, they are kept at backburner, however when the break out from a range happens, the trade is initiated. In the recent rally of banking stocks, there were many counters that were fundamentally very strong and led the rally. However few stocks that were not so strong fundamentally just followed them and momentum traders jumped into them when technical breakout happened. Momentum trading isn’t about tracking one particular stock, but rather looking at the trend in a particular type of stock.
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Swing trading helps a trader to capitalize the short term swings in the stock market. A swing trader’s time frame of trade generally varies from a few days to two or three weeks. So it is typically less than the time frame of ‘buy and hold’ strategy. As the swing trading is generally intra-week or intra-month, it becomes extremely crucial for a trader to choose a right stock and right timing of the entry to benefit from the optimistic or pessimistic momentum. Share trading for the beginners who want to make their feet wet, this kind of trading is best one to begin with as it avoids distraction which generally happens in long term trading while keeping intraday volatility at bay.
Swing traders use technical analysis, combined with discipline and money management. The above figure suggests a swing trader that the second last candlestick, being a Doji and a break above the same indicates a buy trade, keeping a stop loss below the low of Doji candle and a target- SL ratio of around 1.5. The idea is to capitalize the corrections in a longer term trend. Fibonacci retracements.
Guerrilla trading is generally exercised by experienced traders wherein a large number of trades are executed on a daily basis and the aim is to generate miniscule return from each trade, ending up in huge profits at the end of the day as the risk involved is quite high due to excessive number of trades. Technical analysis is generally used by Guerrilla traders, using 1 minute or tick chart so as to make use of smallest time frame to generate trades of few pips in forex (for example). These traders target around 20-25 pips target and try to keep stoploss not more than 10-12 pips. Guerrilla trading is only possible in deep markets with low spreads while keeping commissions and brokerage lower. A successful guerrilla trader should be very quick as deep markets generally have notoriously high volatility. Also, a good backup of capital is preferred, keeping in mind the large number of trades being executed.
Consider a guerrilla trader having capital of Rs 50,000 to be used as margin in a forex trading account. The bank charges margin requirement of 2%, which means that it offers leverage of up to 50 times. Trading spread is of 2 pips on EUR/USD and commission is charged at Rs 35 per Rs 1 million traded.
Assuming that a trader executes 10 EUR/USD trades on a given day with an average position size of EUR 1 million. The trader has six profitable trades with an average gain of 12 pips and four losing trades with an average loss of 6 pips. Assumption: EURUSD exchange rate is 1.4000.
Based on the average position size of EUR 1 million, each pip is worth exactly Rs 100/-. Therefore, the trader’s profit and loss (P&L) position looks like this:
Profitable trades = 6 x 12 pips per trade x Rs100 per pip= Rs 7,200/-
Less: Losing trades = 4 x 6 pips per trade x Rs100 per trade = (Rs 2,400/-)
Gross P&L = Rs 4,800/-
Less: Trading commissions: Rs 455/-
(10 trades x EUR1 million x 1.4000 = Rs 14 million total value of trades x Rs 35 per Rs 1 million traded = Rs 490).
Net P&L = Rs 4,310/-
As the example establishes, guerrilla trading victory plan depends on the trader’s skill to cap loss making positions speedily, and allow the money-making positions to continue for long to make adequate gains that can offset such losses. At Rs 100 per pip, even a single loss of 50 pips would wipe out most of the trader’s gains low brokerage high exposure structure over a trading session.
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Scalping is a unique kind of stock trading that require high energy individuals who are ready to take hundreds of trades in a day, risking very small capital each time. Very tiny profits in tens and hundreds of trades make up huge till the end of the day. Sometimes scalpers are happy earning only few cents in their trades but commission structure plays a crucial role in this kind of trading. Scalpers require high-end softwares which have fastest price updates and sometimes charting information as well. Scalpers typically are glued to their screens during market hours and are distinguished from market makers by a very think line.
A scalper is generally interested in miniscule returns from each trade combined with huge number of traders, instead of fewer ‘huge profitable’ trades. For example, a scalper may initiate a trade on the EURUSD pair with a 5 pip stop and exits once it has moved 3 to 5 pips in profit. What is required in this kind of trade is a very high win to loss ratio and very low brokerage high exposure structure. This strategy is for those who love action packed trading.