Most of us identify trading with the short term buying and selling of securities with the intent of making profits. Of course, trading has to be done with finesse, insights and with a lot of discipline. Of these characteristics, it is discipline that matters the most. However, trading itself has a lot of sub components. There are different types of trading styles that traders adopt and each has its own unique features and skill sets required. Here are some very common styles of trading that traders generally follow.
Taking a longer term view with Positional Trades
In terms of time frame, positional trading has a longer time implication. Positional trading is built around opportunities and hence could span a period of a few weeks to a few months to even a couple of years. Position traders typically use a combination of technical charts, news flows and fundamental triggers to make trading decisions. While fundamentals are used to ratify a story, the news flows are used as the trigger for a positional trade. Technical charts are used to time the entry and exit of the trade. Typically, very short-term price fluctuations are ignored in favour of identifying and profiting from medium to longer-term trends. Some even argue that this style of trading closely resembles investing. However, there is a difference. The traditional buy-and-hold investing involves long trades only (profiting from a rising market), but position traders look at both long side and short side trading strategies depending on the strength of the trigger.
Leveraging the power of intraday trading or just Day Trading
Day trading refers to a style of trading in which positions are entered and exited on the same day. You can either buy in the beginning of the day and sell before the end of the day or sell at the beginning of the day and buy back before evening. Day traders don’t take delivery into their demat accounts as they don’t prefer overnight position. Every trading is a new trading unit for them. Since they place intraday orders, they are able to leverage their margin more effectively than positional traders. Intraday traders hold positions ranging from a few minutes to a few hours. Typically, these traders are themselves very sophisticated chartists and take very acute positions based on levels. Day trading is a time consuming affair since positions have to be constantly monitored and traders need to be immediately aware of any triggers. Day traders typically use the power of technology and algorithms to execute trades.
Capturing short term market moves with swing trades
Swing trading captures short term moves and the positions are held for a period of days or weeks. Swing traders also rely extensively on technical analysis, news flows, breakouts and price action to determine profitable trade entry and exit points. Such swing traders pay a lot less attention to the fundamentals. Trades are closed with a degree of discipline when a previously established profit target is reached or if the trade is stopped out.
Tapping mispricing opportunities with arbitrage trading
There are different types of arbitrage trades available in the market. There is exchange arbitrage (which does not really exist any longer). Then there are cash-futures arbitrage where the returns are a little above the bond returns. Traders also do arbitrage with option mispricing but that is typically done with the help of algos. The scope of profits are much lesser in arbitrage trading but the risk is also quite less since it is a long short-position. Typically, arbitrage requires locking up capital so it is more popular among institutions, proprietary desks, mutual funds etc.
Large volume, small margin trades through scalp trading
Scalpers are important to the market as they create liquidity and also compress the bid ask spreads in the market. Scalp trading is a highly active form of day trading that involves frequent buying and selling throughout the trading session. Scalp traders deal in large volumes of transactions but target the very small intraday price movements and rely on churning capital multiple times for small gains. Scalpers are very cost sensitive and typically trade on very low commissions as their volumes are large. Scalp trading can often be risky because it relies on having a high percentage (odds) of winning trades. At any point of time, a few bad trades can change the complexion of your capital.
Harnessing the power of High Frequency Trading (HFT)
This is a recent addition in India and operates largely through technology driven execution and algorithms. HFT is also done with low latency to be really meaningful. Most of the HFT traders will trade across multiple markets and multiple asset classes so as to keep their overall risk in check. It is almost impossible to execute such trades manually. In the last few years, HFT has been blamed for a lot many flash crashes in the market.
Style is an important component and traders to choose the style that not only fits into their personality but also promises the best return on investment (ROI).
Disclaimer: The above opinion is that of Ms. Sneha Seth (Derivatives Analyst - Angel Broking) & is for reference only.