What is trading? - Types of trading in India
The process of buying and selling in different financial assets like Stocks, Bonds, Currencies, Commodities and Derivatives in the controlled market is called Trading which are controlled and managed by Exchanges.The aim of traders in trading is to achieve profits by capturing the gap while fluctuating in the value of financial instruments.
We do trading to gain profits in a shorter time period while traditional investing focuses on holding the assets for a longer period of time to gain some profits. In Trading buyers aim to Buy the instrument at lower price and sell it at higher price in uptrend market and seller tries to sell the instrument at higher price first and then buy back it at a lower price in falling market.
What is the stock exchange?
Exchange is a place where your order requests of buying and selling gets fulfilled. Basically Stock exchange is a matchmaker between buyers and sellers. It connects buyers with sellers and vice versa. There are many stock exchanges in India but two are major exchanges
- BSE (Bombay Stock Exchange): Bombay Stock Exchange was established in 1875 which led to the beginning of formal trading in India. BSE has an important role in shaping the financial structure of the country.
- NSE (National Stock Exchange): NSE brought innovation and diversification like Derivatives and currency trading in India. It plays a strong pillar in the financial development of the country.
History of Trading
Trading in India comes from a very ancient Indus valley civilization centuries ago of modern human existence. Trading was there in the form of a barter system but then formalised by the Gupta Empire after they created a golden coin which can be exchanged to buy anything.
It was the 19th century where stock trading was formalised by the formation of the BSE.
Types of trading
There are many types of trading to achieve different financial goals with different risk/reward factors. But mainly there are 5 types of trading which have properly proven strategies and setups and legal.
1. Day Trading/ Intraday Trading:
As the name itself says trading within the day is called Intraday Trading. Here you have to take a position and have to close it before the market closes wheather you are in profit or loss.
Key Characteristics:
- Day is done in a high frequency of trades, multiple trades have to be taken to be profitable or else it can go into major losses.
- Quick decision taking ability is needed in Intraday Trading because prices change very quickly in stocks and if you miss a perfect entry or proper exit
Advantages:
- Intraday trading has a high potential of quick profits because it is done quickly and immediately.
- There is no risk for overnight changes in the market so you can have peace of mind.
- Big moves can be observed for people who like high volatility.
Disadvantages:
- Unable to hold for the next day if the market goes against your direction and you have to book the loss even if there are high chances of return tomorrow.
- Requires a significant capital to invest and need high knowledge of both fundamental and technical analysis.
Best strategy for Day Trading:
There are a number of strategies available for day trading, they are chosen according to the suitability of the trader. Few are
Gap trading
Breakout trading
Trend following
Price action and many more
Suitable for:
Day trading is basically suitable for candidates with time, Strict discipline and High risk tolerance.
2. Swing Trading:
Swing trading is mostly done in the equity market or Cash market. You have to cash buy the stock after deep analysis and hold it for a short period until you reach your target. It is also done in options which is known as carry forward.
Key Characteristics:
- Here you have to hold the stock or any other financial instrument for few days and few weeks in some cases to book your profit or loss
- As this is done in the equity segment, you are expected to know both fundamental and technical analysis.
Advantages:
- You have more options and choices when compared to day trading
- You are not required to invest your full time on the observation
Disadvantages:
- There will be a risk of overnight changes in the market due to some news or bigger decisions and you can do nothing about that.
- Swing trade needs a lot to discipline and patience because of longer holdings
- You need bigger capital for some good profit as you will be buying shares.
Best strategy for swing trades:
There are many ways and strategies to trade in swing trading, but effective ways are
News Trading
Result Day Trading
Fundamental Analysis
IPO buying
Suitable for:
Swing trading is suitable for working individuals with basic knowledge of the equity segment and moderate risk taker.
3. Scalping
Referring scalping as ninja trading won’t be a bad idea. Scalping is a super quick method of trading. You have to keep your finger ready on the exit button immediately after taking entry.
Key Characteristics:
- Scalping is a very short term trades sometimes even minutes or seconds
- Here traders play on higher volume with small movement
- Sometimes scalping can also be done in highly volatile markets to catch bigger moves.
Advantages:
- Many opportunities can be seen to make frequent profits
- Very minimal exposure to the market risk as we do not allow it to go in the opposite direction.
Disadvantages:
- Requires very high focus on the trade taken or else the situation can take a horrible turn as you will be playing with huge quantities.
- Transaction cost will be charged for all trades, sometimes it surpasses total profits.
Best strategy for scalping:
- High Volume trading
- HFT platforms
- Directional trading
- Trading at lower time frames
- Zero loss tolerance mindset
Suitable for:
Suitable for all traders where you just have to be very very quick
4. Positional Trading
It can also be called an extended version of swing trading. Here also investors have to be invested for a longer time period. Here we need to focus on long term market trends and mostly done in the equity segment.
Key Characteristics:
- In positional trading we have to plan for a long period of investment for like months or a year.
- Here we need to do macroeconomic analysis which decides the future of the company and sector as well.
Advantages:
- It is very less time consuming mostly done by busy individuals with High Net Worth.
- Transaction costs are very negligible in positional trading.
Disadvantages:
- Exposed to high risk because of longer holding period
- Requires strong fundamental and economical knowledge for analysis
Best strategy for Position trading:
- Fundamental Analysis
- Economic Analysis
- Long term technical indicators like Exponential moving average
Suitable For:
Positional trading is suitable for long term view traders and less frequent traders
5. Options Trading:
Transaction of contracts which gives rights to buy and sell the asset instead of stocks with an expiry date is known as options trading.
Key Characteristics:
- Highest profit and Loss possibility is in Options trading
- You can buy both up rally and down rally of the market with lesser capital in higher lots.
Advantages:
- Options trading gives an open market market where lesser capital can make higher profit in higher momentum.
- Gives good grip on the market and technical analysis
Disadvantages:
- Higher chances of loss are traded well or in presence of mind.
- Chances of premium decay even if direction is correct but market is slow.
- Has expiry where it becomes zero.
Best strategies for options trading:
- Options trading can be done in all setups
- EMA
- Breakouts
- Breakdowns
- CPR
- Price action
- Chart Patterns etc.
Also Read: SIP Vs Lumpsum : Which One Is Better?
We have discussed many types of trading possible according to the Risk to reward ratio, Duration and Time availability.
You can choose your style according to your availability and risk appetite and loss bearing capacity.
It is important to educate yourself before trading and continue learning the key. We encourage you to start with paper trading before jumping into the real market.
FAQ
How to start trading?
The best way to learn trading is to start learning about the market and then start paper trading to avoid losing real money and then start trading slowly with little capital amount.
Free stock market courses?
There are no completely free courses but yes! You can find topics on youtube to start the journey
Is Forex trading legal in India?
No. Forex pairs trading is not legal nor controlled by authorities. But few pairs are legal and getting traded in like USDINR, EURINR, JPYINR etc. You Should think twice before starting full fledged forex trading.
How does trading work?
All that is happening is buying and selling in the exchange and the process is known as trading.
Which Trading style is best?
It completely depends upon your learning skills, Patience and loss bearing capacity. Before choosing style we recommend to analyse yourself either you are ready or not.
