Top 10 ways to trade in India

Options are everywhere. Whether you want to buy some clothes or you want to order from the menu of your favourite pizza place. You can see that there are varied sets of options given to you in the form of designs, colours and sizes for your clothes, and sizes, toppings and other customisations for your pizza.

So, when there are so many options out there, wouldn’t you want to have options when it comes to trading in the stock market as well? Well, for starters, stock markets do present a lot of options, and there are just so many of these that investors or traders can often get confused. This is why we are going to be looking at all the kinds of trading styles that there are.

What is Trading?

To "trade" is to purchase and sell stocks, currencies, or commodities with the intent of generating a profit. Technical analysis is often used by traders to see patterns in the market, and leverage is sometimes used to increase earnings.

Making money in the stock market may be done by either trading or investing, but these two approaches are not interchangeable.

1. Buying and selling stocks, currencies, or commodities with the expectation of a quick profit is known as trading. Trading involves focusing on price movements to find patterns and buy/sell shares accordingly. The fundamental performance of the stock or the company is not taken into account.

2. Investing is the practice of purchasing assets with the expectation that they will provide a profit or increase in value over time. Fundamental analysis is often used by investors to determine an asset's worth, and a diversified portfolio may help mitigate risk.

The time horizon is the key distinction between trading and investing. Investors are more likely to hold their assets for the long term than traders are.

The Different Kinds of Trading Strategies

Ten trading styles are listed below to understand stock trading in India. If you wish to trade in securities, read on, find the style that suits you and proceed. 

Day Trading

Day trading may be suitable for those who are not comfortable with the intensity of scalp trading yet do not want to maintain positions overnight.

Day traders enter and exit positions on the same day (as opposed to swing and position traders), eliminating the possibility of huge overnight changes. At the climax of the day - they either earn a profit or incur a loss in their position. Trades are typically held for minutes or hours in day trading, requiring ample time to assess markets and constantly monitor positions throughout the day. Day traders, like scalpers, rely on numerous tiny gains to generate profits.

So, whether it is in Indian or the US markets, if the securities are bought and sold within a day, the assets are being day traded.

Scalp Trading

Scalping or scalp trading is the practice of benefitting from tiny price swings in securities. Scalpers typically keep a trading position for a relatively short length of time, ranging from a few seconds to just a few minutes, with the goal of profiting on small price movements. These small price movements result in significant profits due to the large amount that scalpers usually engage in the stock/asset in question.

Traders who employ the scalping strategy must consider transaction fees as well as bid-ask spreads. Because of the frequency with which the scalper trades, these fees can be significant if not controlled efficiently. Scalping also necessitates quick decision-making, focus, and discipline, as scalpers need to be able to enter and exit their positions quickly in order to capitalise on slight price swings.

Position Trading

Positional traders, like day traders, look for a stock's momentum before purchasing it. Instead of tracking price levels, the stock’s momentum analyses how quickly prices are changing. Price changes over a predetermined period of time are used to calculate the stock’s momentum. Positional trading, unlike day trading, does not allow you to sell early and buy afterwards (aka shorting). It is a medium-term strategy for traders who are willing to ignore short-term price volatility in order to focus on long-term gains. 

Some positional traders examine stock price action to determine entry and exit positions. To analyse the stock's journey, they create support and resistance lines on a chart. Technical indicators are used by some positional traders to forecast the stock's future direction. Popular technical indicators include RSI, MACD, Volume, Moving Average, Simple Average, and so on.  

Momentum Trading

Momentum trading is one of the simplest methods of trading in the stock market. Momentum traders attempt to forecast a stock's momentum in order to enter or exit at the optimal time. If a stock is going to break out or has already broken out, the momentum trader will exit. If a stock falls in value, they buy low and sell high.

Swing Trading

Unlike day traders, who often maintain positions for less than one day, swing traders typically hold positions for multiple days, if not weeks. Because positions are kept over time, traders do not need to sit constantly monitoring the charts and their transactions throughout the day to capture short-term market swings.

This makes it a popular trading method for those who have other responsibilities (such as full-time work) and want to trade in their spare time. However, it is still vital to devote a few hours per day to market analysis.

Swing traders (and certain day traders) typically employ trading methods such as trend trading, counter-trend trading, momentum trading, and breakout trading.

High-Frequency Trading

Because some of these trading strategies necessitate incredibly quick replies, high-frequency trading (HFT) has grown in popularity. This is an algorithmic trading strategy used by major corporations to execute a high number of orders in a matter of seconds.

However, it is not typically recognised as a trading style because it relies on underlying technology to complete transactions rather than a trader's personal preferences or plan. Individual traders cannot compete with huge institutions since HFT is not generally available to them.

Trend Trading

A trend trading method focuses on technical analysis to determine the market momentum's direction. This is typically seen as a medium-term strategy, best suited to position traders or swing traders, as each position will remain open for the duration of the trend.

An asset's price can move both up and down. If you were to take a long position, you would do it when you feel the market will achieve new highs. If you were intending to short the market, you would do so if you felt it would reach lower lows. Derivative instruments, such as Contract For Difference, are popular for trend-following techniques because they allow traders to go long and short at the same time.

Throughout the trend, trend traders will utilise indicators to identify probable retracements, which are temporary moves against the main trend. Retracements are commonly overlooked by trend traders, but it is critical to establish that they are a transitory move rather than a complete reversal, which is a signal to exit a trade.

Breakout Trading

Breakout trading is known as the strategy of entering a trend as soon as possible, anticipating the price to 'break out' of its category or range. Breakout trading is popular among day traders and swing traders because it capitalises on short- to medium-term market changes.

Traders who employ this approach will seek price points that signify the beginning of a period of volatility or a change in market mood - by entering the market at the right level. These breakout traders may ride the movement from beginning to end. It is common for traders to set trigger points. These trigger points are various price levels that the stock may hit. When these prices are reached or crossed from either direction, a buy or sell order (based on the trader’s strategy) is placed.

These triggers help reduce the trader’s engagement with the stock markets by removing the need to constantly monitor the prices.

Reversal Trading

The reversal trading method is focused on predicting when a current trend will shift. Once the reversal has occurred, the technique will resemble a trend trading strategy in that it can exist for varied lengths of time.

A reversal can occur either way because it is simply a shift in market sentiment. A 'bullish reversal' signals that the market has reached the bottom of a decline and will shortly begin to rise. A 'bearish reversal' signals that the market has reached the top of an uptrend and is about to enter a decline.

Arbitrage Trading

Profiting from price differences across several marketplaces or exchanges is the goal of arbitrage trading. Arbitrage trading aims to acquire an asset at a certain price from one exchange or marketplace and sell it at a higher price at a different market.

If the price difference between the buy and sell is not too great, the traders needs to engage significant capital to make a meaningful profit. Smaller capital engagements would make sense if the price difference is large enough between the two exchanges/marketplaces.

Since this requires less analytical expertise but greater network speed, it is reserved for premier trading companies with extensive infrastructures.

The Bottom Line

In conclusion, the Indian stock market offers a multitude of trading options for traders. From traditional trading methods like cash trading and futures and options trading to modern techniques like algorithmic trading and high-frequency trading, there is a trading style to suit every trader’s needs.

However, it is important to note that each trading method comes with its own set of advantages and risks, and traders must conduct thorough research and analysis before choosing a trading style. With the right approach and a sound trading strategy, traders can make profitable trades in the Indian stock market and achieve their financial goals.