Let us understand the different types of trading available in the Indian Market before entering the world of stock trading. We will explore the different types of trading, including intraday trading, position trading, swing trading, scalping, momentum trading, fundamental trading, technical trading, delivery trading, crypto trading, and foreign exchange trading.
What is Trading?
Let’s simplify this: Trading is the process of buying and selling assets such as stocks, commodities, currencies, bonds, and derivatives with the aim of making a profit. It has a short-term goal different from traditional investment with a long-term goal. Trading commonly occurs in the stock market, as the public buys and sells listed securities every second.
Apart from shares of a company, you can trade assets such as bonds, Forex, commodities, indices, etc.
We have talked in detail about the stock market in our previous blog. We have simplified it so that even a beginner can understand what happens in the market. It would be a shame if you don’t read it:
Stock Market: A Complete Guide
Types of Trading
Let us take a look at the different types of trading.
Intraday Trading
Intraday trading, also known as day trading, is buying and selling financial instruments on the same day. Intraday traders make use of the short-term price variations in the securities within a day. Because of their short-term nature, they take advantage of technical analysis; they study patterns, price charts, and technical indicators to reach trading-related decisions.
Intraday trading offers the possibility of a bigger number of trades in a single day following the price fluctuations of each second. They usually close their activities before closing the market to avoid an overnight market crash. Intraday trade requires quick decision-making skills and discipline. Traders must closely watch the market movement to make informed decisions throughout the day.
Suggested Read: All About Intraday Trading
Position Trading
Position traders take a long-term approach to trading, with positions held for weeks, months or even years. They are least concerned about the daily market fluctuations; rather, they focus on larger market trends. They rely on fundamental analysis of company finance and larger economic trends. They make use of financial statements, news, and industry analysis to identify assets with long-term growth potential. A successful position trading strategy needs broader knowledge of society and the economy as a whole.
Swing Trading
Swing trading is a middle path between position trading and intraday trading that aims to capture the price swings in the market. This medium to short-term strategy will make use of the price volatility within the uptrend and downtrend. They use technical analysis of patterns and trends to decide the entry and exit points.
Scalping
Scalping works with the expectation of adding up small and quick profits. In intraday trading, it aims to make a large volume of small profits by buying and reselling. It requires the trader to have a clear-cut exit strategy and access to live feed. Scalping can be done manually or with an automated training system. Since one large loss can diminish multiple smaller gains earned, constant monitoring and immediate action are required in scalping.
Momentum Trading
Momentum trading works on the principle that stocks that have performed well in the past will continue to do so in the future, while those that have performed poorly will continue to underperform.
Traders who use this strategy will look for shares with recent upward or downward price momentum. They enter the trade with the belief that the same trend will continue for a certain duration. Traders make use of technical analysis to understand and analyze the short-term or long-term momentum of the market trend of particular stocks. According to the identified trend, trading can be short-term or long-term.
Risk analysis is a major factor in momentum trading and traders sometimes place stop-loss orders to reduce the potential loss and set profit targets.
Fundamental Trading
Fundamental trading is an investment method where the intrinsic value of a company is analyzed to buy or sell stocks. The trader will analyze economic value and other quantitative as well as qualitative elements of the company. Some factors that traders will analyze in fundamental trading are:
- Financial statement of the company
- Economic indicators such as employment growth and GDP growth rate.
- Industry analysis; Industry trends, competitive environment, and regulations
- Company Management
- News and events related to the company or that will impact the company
- Long term perspective
Technical Trading
Technical trading uses historical data of the company’s stock movement to buy or sell stocks. This method uses past data to identify the trends and patterns and arrive at a trading decision on the basis of the analysis. They take insights from past data to make future decisions. Key factors they analyze to arrive at a decision are:
- Price chart
- Technical indicators like moving average and relative strength index.
- Trading volume analysis
- Trend analysis
- Market sentiment
Delivery Trading
Delivery trading involves the physical transfer of ownership of stocks or other financial instruments. Unlike intraday trading, the buyer holds the share longer in delivery trading. The buyer takes the actual ownership of the shares, which are transferred from the seller’s account to the buyer’s account. Investors consider the delivery trading method as a long-term investment medium with the intention of benefiting from the company’s growth. Shareholders of delivery trading may obtain the voting rights of the company and receive dividends as and when the company declares it.
Because of the long-term nature of delivery trading, it is up to the decision of the investor to choose the method after analyzing his financial goals and risk tolerance.
Algorithmic Trading
Algorithmic trading or automated trading is one of the types of trading that uses computer algorithms to execute trading strategies. It uses a defined set of instructions, and algorithms, after analyzing market data. Sometimes, following a mathematical model, this method analyzes data, executes the trade, and manages a portfolio.
Future Trading
Future trading uses contracts to buy or sell specific assets at a set future date and price. Individual investors use future trading with the speculation of price change in the future.
Crypto trading
Trading in cryptocurrencies involves buying and selling digital currencies like Bitcoin and Ethereum. Cryptocurrency is not issued or regulated by any central government authority in India. So until the government arrives at a framework and regulation, investing in cryptocurrency is a risk.
Foreign Exchange Trading
Currency trading or foreign exchange trading is the buying and selling of currency pairs in the foreign exchange market. It is a decentralized world market where the currencies of various countries are bought and sold. In Indian exchanges like BSE and NSE, FOREX trading is allowed.
Frequently Asked Questions About Types of Trading
1. Which type of trading is suitable for a beginner?
It is advisable, to begin with a less complex trading system. However, no trading is risk-free and you need to educate yourself about the trading basics before entering into stock trading.
2. What are the four major types of trading?
Position trading, day trading, swing trading, and scalping are the major types of trading.
3. Do you need to know the trading methods and strategies to begin with trading?
It is always advisable to know the basic trading strategy even if you are depending wholly on your broker. To choose a broker, also you need basic trading knowledge.
4. Where will you receive advice from SEBI-registered experts about trading?
You can join the Gap Up telegram channel and avail daily calls and tips from SEBI registered experts.
5. Is crypto trading legal in India?
There is nothing illegal about crypto trading in India. But crypto trading is unregulated in India, and you have no authority to reach out in case of any safety issues.
It is not legal tender in India. The government introduced a tax of 30% for income from crypto trading.
