Well, this is the situation in stock market trading. Many traders have spent many decades in this field, and when you take a trade, don’t forget you are fighting against them!
Hence, it is better to prepare ourselves and build an armory before planning to take trades.
I am answering in detail about this preparation, and it consists of 4 parts:
What are the Types of Trading?
What are the Different Trading Instruments available to Trade?
10-Steps to Elevate your Trading Skills
Checklist before taking Trading as Full-time Career
What are the Types of Trading?
Different types are trading in the stock market based on two parameters:
– Time-frame of the trade
– Technical Aspect
Image – Different Types of Trading
Based on the timeframe of the holding, we can identify 4 different forms of trading.
1 – Scalping
Scalping is a very short-term trading strategy that aims to make profits from the trades’ quantity and volume rather than focus on maximizing each trade’s gains.
Typically the holding period is very few minutes. It got its name because people who adopt the style—known as scalpers—they quickly enter and exit the market to accumulate small profits off of a large number of trades (and quantity) throughout the trading day.
Please note only experts can do successful scalping. If you are a beginner in the stock market, please avoid scalping.
2 – Day Trading
Day Trading, also recognized as Intraday Trading, is a famous trading type in the trading community.
In Intraday Trading, one has to close their trade on the same day. If the stock has moved in the expected direction, then the traders will make profits. Otherwise, they lose money.
Suppose a stock opens at Rs 200 in the morning, and soon price moves to 225 within 1-2 hours. If a trader had bought 1000 shares in the morning and sold at 225, then he would have made a decent profit of Rs 25,000 within a few hours. This is the advantage of Intraday Trading.
3 – Positional Trading
Positional trading is a type of trading in which a trader carries the positions overnight for a few days or weeks.
A person need not be a full-time trader and keep himself glued to the screen for the entire day like a scalper or intraday trader.
BTST trades, STBT trades, or any trading type with a few days to few weeks holding period will fall under positional trading.
4 – Investment
Any holding period between a few months to years will fall under the investment category.
When it comes to investing, there are two schools of thought:
Fundamental Analysis and
Technical Analysis
Fundamentalists are more concerned about the company’s management, various products, Sales, Price to earnings ratio, Balance sheet, Cash flow, Debt to equity ratio, etc. Broadly they are concerned about qualitative as well as quantitative aspects of the Company analysis.
Technical Analysts consider the analysis of past behavior of prices to interpret their study. They believe that the price contains all the information, and it’s enough to analyze the price chart.
Again based on the technical concepts, we can identify 4 different forms of trading.
1 – Breakout Trading
A breakout trade opportunity is nothing but a stock price moving outside a defined resistance level with increased volume.
A breakout trader enters a long position after the price breaks above the resistance level, keeping a stop-loss below the resistance.
In this process, they either trail their stop-losses or target to exit at higher levels to make profits.
2 – Price Action Trading
‘Price Action Trading’ is a trading technique in which a trader reads the market and makes subjective trading decisions based on the price movements, rather than relying on technical indicators or other factors.
In simple words, traders use only ‘Price’ and ‘Volume’ to make any trading decisions.
3 – Swing Trading
Swing trading is a trading technique that seeks to capture a swing when the price goes to a complete sideways zone.
The idea is to get out of the trade before the opposing pressure comes in. It means you look to book your profits before the market reverses.
Swing Trading Strategy
1. Identify a range-bound market or script based on individual choice.
2. Observe price action carefully at the Support level (for a long trade) and the Resistance level (for a short trade).
3. If there is a firm price rejection at the support level, then go long on the next candle open (the technique is the same for a short trade if there is a rejection at resistance level).
4. Trial your stop-loss when the price moves upside and book profits before the Resistance level (for short trades, book profits at support level).
4 – Indicator Trading
In this type of trading, traders depend on 1-2 indicators to plan their trades.
Technical Indicators help beginners in the stock market as they bring some discipline by avoiding unnecessary trades. They also help Algo Traders to design a mechanical system to manage their work.
I will take one simple example of the ‘Stochastics’ indicator.
Stochastics is an oscillator that compares the closing price to the range of its prices over a given period in the selected instrument. Then it plots the values within the range of 0-100.
A reading of 80 and above is considered overbought, and a reading of 20 and below indicates oversold.
What are the Different Trading Instruments available to Trade?
We have below 3 trading instruments in the stock market:
1. Equity
2. Futures
3. Options
So, a trader should know how these trading instruments work.
Let us take an example to understand better.
Assume one Trading Account has Rs. 3,30,000 (3.3 Lakh).
ACC Current Market Price CMP is 1620.
Assume ACC went 5% (81 points) up in the next 2 trading days. (Explanation sake)
Case-1: Equity
With 3.30 lakh, one can buy 203 shares.
Profit made due to 5% upside movement is Rs.16,443 (203 shares X 81 points)
ROI on Capital is 5%
Case-2: Futures
With 3.30 lakh, a trader can buy 1 lot (500 shares).
Profit made due to 5% upside movement is Rs. 40,500 (500 QTY X 81)
ROI on capital is 12%
Case-3: Options
With 3.30 lakh, one can buy 7500 QTY of 1700 CE of ACC.
Profit made due to 5% upside movement is Rs. 2,43,000 approx (IV at 40%)
ROI on Capital is 74%
ROI varies drastically in all the 3 trading instruments.
Please note this explanation is not intended to encourage trading in options. F&O trading carries the highest risk levels, and the above description gives an overview of how the three trading instruments work by offering different degrees of risk and reward.
10-Steps to Elevate your Trading Skills
Below are the points to learn Trading:
Read a few good books on the stock market.
The first time, read in general (to understand the concepts)
Next time, read and try to locate the information on charts
Get an idea of what type of trading suits your personality, whether it’s intraday, positional trading, swing trading, or price action trading.
Suppose say you started liking price action trading. Then study in-depth about price action trading. Read good books on price action trading, look for any good online course on price action trading, follow successful traders, and take advice from them.
Once you get a fair idea of price action trading, then finalize one trading system. A trading system should have entry price, stop-loss price, and profit booking price.
Once you have a trading system, check the system with past data. If it offers a minimum of 50% accuracy and 1:2 risk-reward, it is an excellent system.
Then start taking trades based on your trading system. But ensure not to risk more than 1-2% of your trading capital on any trade.
In this process, you will commit some mistakes. It would help if you study your mistakes as it has a lesson.
Next, avoid making past mistakes in trading.
Please note, Trading is like any other skill which demands persistence effort, focus, and dedication.
Checklist before taking Trading as Full-time Career
It is good to see many enthusiastic and young people from other professions are interested in checking their luck in stock market trading.
However, specific precautionary steps are necessary before considering trading as a full-time profession, even if a trader has decent success as a Trader as the Market situations always change.
Besides, it is common to see people attracted to the luxuries available in trading. Sometimes, they plan to jump to Full-time trading to avoid the problems in their current profession.
Below are the checklists one should look at before they consider Intraday Trading as a full-time career:
1) Zero Debts: If a person has a monthly commitment (EMI) towards any loan, this will add extra pressure to his Trading career as he has to generate this commitment amount every month. Sometimes, there will be no opportunities in the market. If he fails to make money in the market, extra pressure will be created in his mind, impacting his trading decisions.
2) Savings: One should save enough money to run the family for at least one year. Suppose if a person needs Rs. 1, 00,000 (or 2000 USD approx) per month to look after all the expenses in your family, he has to save Rs. 12, 00,000 (or 24,000 USD approx) before taking trading as a full-time business. This amount is excluded from the trading capital.
3) Trading Results: Trading looks very simple when a beginner makes some quick money. However, one should realize that the market conditions are always dynamic. It requires enormous skills to make consistent money in the market. So it is better to measure our trading success before we take the extreme step.
It is a good idea to consider yourself as a successful trader only when: (I) you make at least six months of your current salary from trading profits in total and (II) you make profits for three consecutive months in trading.
4) Trading Capital: Only the above parameters are insufficient to quit the current job and jump into trading. One should have sufficient Trading capital to make profits in the market. Suppose a trader can make 10% returns every month, then he needs a minimum of Rs. 10, 00,000 (or 20,000 USD approx) as your trading capital if your monthly expense is around Rs. 1, 00,000 (or 2000 USD approx).
5) Trading Discipline: One of the most significant features in full-time trading is ‘You are the Boss’ to your work, and you do not have to report it to anybody. Usually, we are used to the ‘Reporting’ style of work, and this freedom may work against you if you do not have serious trading plans and goals. Hence, it is better to have some goals before a person commits to full-time trading.
I hope this detailed answer is helpful!