In this article, we will discuss
8 Different Types of Trading Styles - ExplainedDiscussed below are 8 different types of trading styles; mastering one can help you earn lucrative returns:
1. Day TradingAlso known as intraday trading, this trading style is definitely one of the riskiest. As the name suggests, intraday traders open and close all their positions on the same day. They do not carry any of their positions to the next trading day. Traders often use it to make higher returns by capitalising on the small movements of the market. Day trading also allows you to buy stocks on margin, i.e., by paying just a fraction of the total value of stocks and borrowing the rest from the broker. Depending on your strategy, you can buy first and sell later, or sell first and then buy later. Since you don’t hold the shares, you don't need to pay any demat charges either. Even though it is highly profitable, it is also an extremely risky trading style, and you can end up losing all your capital.
2. Position TradingUnlike day trading, position trading is one of the more stable trading strategies where the trader buys a security and holds it to reap long-term benefits. The shareholding position can last for days or months, depending on the strategy of the trader. For any trader interested in position trading, you must learn to be patient and not let yourself get affected by the slightest movements of the market. Since you hold your stocks in this trading type, you incur demat charges on the same
3. Options TradingThe third type in your trading education is options trading. It is a form of contractual trading where stocks derive their value from an underlying asset An option trader enters a contract with an underwriter or seller. It gives them the option to exercise their right to buy or sell a particular stock on a particular day at a predetermined price. When the contract is to purchase stocks, it is called a call option, and when the contract is to sell, it is called a put option Example: Let’s say a trader buys an option contract to purchase 100 units of Stock X at ₹300 on 30th Aug 2023, assuming it to be a bull market. Now on the day of exercise, if the stock is trading at ₹350 in the market, the trader can exercise his/her contract to buy the 100 units at ₹300 each However, if the price in the market is ₹250 and it becomes a bear market, the trader can let the contract expire worthless as it won’t make sense to buy the stocks at a higher price
4. Futures TradingOptions and Futures trading are quite similar except for the simple difference that while options trading is a right, futures trading is an obligation. Hence, if on the date of exercise, even if the future buyer doesn't wish to execute the contract, they will still have to do it It carries a high level of risk due to the obligation involved; however, it is a great hedging technique. For future trading, you need to have a thorough understanding of the trading strategies and conduct an in-depth market analysis before you start trading. As a future buyer, you don’t need to pay the price of the entire contract upfront. You can just pay an initial margin and pay the remaining amount at the time of execution
5. Forex TradingAlso known as Foreign Exchange trading or FX trading, Forex Trading involves trading of currencies. Unlike traditional stock trading, there are no established stock exchanges for currency trading. There are financial centres across the world that facilitate electronic over-the-counter (OTC) exchange facilities. Four major centres across four time zones are situated in London, New York, Sydney and Tokyo. The centres are functional 24 hours a day. These centres facilitate the exchange of currencies for both operational reasons and to enable traders to make a profit. The exchange is conducted at a pre-determined price agreed upon between both parties. The buyers and sellers here can be individuals, financial institutions, banks, companies and even the Central Banks of countries.
6. Commodity TradingCommodities are naturally made goods, and as the name suggests, commodity trading is buying and selling of such assets. They can primarily be divided into four broad categories, i.e. agricultural commodities, metals, energies, and Livestock and meat. Some examples of commodities that are traded include gold, silver, natural gas, leather, etc. You can trade commodities either by buying stocks of companies that are involved in the process of buying, selling, producing or extracting such commodities, or you can invest in commodity ETFs. When you invest in commodities, it is crucial to do your research and formulate trading strategies accordingly. In some cases, the price of commodity and stock move in opposite directions, whereas in other cases, it moves parallelly
7. Event-Driven TradingVery different from regular trading strategies, the event-driven trading strategy thrives on temporary mispricing of the stock due to a corporate event or announcement. This strategy is mostly used by hedge-fund managers that aim to make profits through news-driven market fluctuation Some examples include news of mergers and acquisitions, change in key management, restructuring, etc. Basically, it involves any event that can cause a change in investor sentiment. This is a very niche style of trading, and investors who use such strategies often have a team of experts who help them in analysing and identifying potential corporate events and the effect of such events on the stock price of the company.
8. Pair TradingTraders in pair trading aim to identify a pair of stocks that belong to a similar industry but come from different companies or brands. The stocks in the pair usually have similar characteristics. In such cases, any impact on the price or behaviour of one stock also affects the price and behaviour of the other stock Pair traders often use statistics, fundamental and technical market analysis, probabilities etc., to identify these pairs. The information obtained helps them determine the dynamics or the direction of the relationship between the two stocks in a pair before eventually executing a trade.
ConclusionAs a trader, it is crucial for you to know the different types of trading options available to you and what suits your style the best. This blog is a comprehensive guide on some of the most common trading types, but this is not an exhaustive list. Other types of trading include swing trading, scalping, fundamental trading, long-term or short-term trading, etc Now that you are familiar with these common types, you can conduct in-depth research on these styles to gain a deeper knowledge of the same.
Frequently Asked Questions
Q1. What are European and American options?Ans. European options are the type of options where the option buyer can exercise their right to buy or sell a commodity only on the specific date mentioned. American options, on the other hand, give you the liberty to exercise your right any day before the expiry. The Indian stock market follows European options trading.
Q2. What is a derivative contract?Ans. Any contract that derives its value from an underlying asset, such as stocks, metals, funds, etc., is a derivative contract
Q3. What are the three types of Forex markets?Ans. The three types of forex markets include the spot market, forward market and future forex market
Q4. What are the main types of stock markets?Ans. The stock market mainly consists of primary and secondary markets. The primary market is where a company registers itself and issues its shares for the first time through an Initial Public Offering (IPO). A secondary market is where investors further buy or sell shares to make profits.
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