Stock trading is one of the most remunerative investment options worldwide. Millions of traders and investors flock to stock exchanges every day to try their luck and trading skills. While some know the trade tricks and make huge profits, others lose their capital in the market. Quite often, traders plunge into stock trading without realising which trading type is the most suitable for them. This article discusses the different types of trading in the stock market to help you make better decisions and earn decent returns.
Day Trading
Day trading, also known as intraday trading, is among the most popular forms of trading in the stock market. Although expert traders rely on intraday trading to make higher-than-average profits, it is also the riskiest. Day traders buy and sell stocks or ETFs (Exchange-Traded Funds) on the same day. Since day trading means closing the positions on the same day, you do not need to pay Demat transaction charges.
Day traders analyse the momentum of stocks, indices, or ETFs to place pinpoint trades. Either they buy first and sell later or sell first and buy later. However, if you are a novice trader, it is better not to trade on margin. Margin trading might increase your losses if the trade goes against you.
Positional Trading
Like day traders, positional traders identify a stock’s momentum before buying stocks. Unlike day trading, you cannot sell first and buy later in positional trading. It is a medium-term strategy for brave-hearted investors who can ignore short-term price fluctuations and focus on long-term gains. Positional traders have to pay Demat transaction charges every time they sell their holdings.
Some positional traders analyse the price action of stock to identify the entry and exit points. They draw support and resistance lines on a chart to understand the stock’s journey. Some positional traders rely on technical indicators to guess the stock’s future direction. Some popular technical indicators are RSI, MACD, Volume, Moving Average, Simple Average, etc.
Swing Trading
Swing traders typically analyze charts across various time frames, such as 5 minutes, 15 minutes, 30 minutes, 1 hour, or even a daily chart, to identify price fluctuation patterns. Swing trading may overlap day trading or positional trading. Traders and investors often consider swing trading the most difficult among the different types of trading in the stock market.
Unlike positional traders, swing traders do not shy away from volatility. Instead, they consider volatility as their best friend. In fact, the more volatile a stock, the better are the income opportunities for swing traders. Hence, if the accurate prediction of the waves is your forte, swing trading is the only thing you need.
Long-Term Trading
Of the different types of trading, long-term trading is the safest. This trading type suits conservative investors more than aggressive ones. A long-term trader analyses the growth potential of stock by reading news, evaluating the balance sheet, studying the industry, and acquiring knowledge about the economy. They do not mind holding stocks for years, decades, or even a lifetime.
Long-term stocks are of two types - growth and income. Growth stocks belong to companies that do not pay dividends to investors. They invest any extra income for the company’s betterment. In contrast, income stocks refer to companies paying healthy dividends at regular intervals.
Scalping
Scalping is a subset of intraday trading. While day traders identify opportunities and stay invested through the day to make profits, scalpers create multiple short-duration trades to profit from the waves. A scalper needs to have high observation power, excellent experience, and an ability to place pinpoint trades.
A scalper does not mind losing a few trades to win a few. At the end of the day, they compare the loss-making trades with the profit-making ones to analyse the profit or loss. A scalper’s trades may last for a few minutes to an hour.
Momentum Trading
Of the different types of trading in the stock market, momentum trading is one of the easiest. Momentum traders try to predict a stock’s momentum to enter or exit at the right time. The momentum trader exits if a stock is about to break out or gives a breakout. Conversely, if a stock tumbles, they buy low to sell high.
Technical Trading
Technical trading, or technical analysis, focuses on analyzing past price movements and trading volumes to forecast future price trends. Traders use charts, patterns like head and shoulders or support and resistance levels) and various technical indicators such as moving averages, Relative Strength Index or Bollinger Bands to make trading decisions.
Fundamental Trading
Fundamental trading involves evaluating a company’s financial health, performance and economic conditions to determine its stock’s intrinsic value. Traders analyze financial statements like income statements and balance sheets, earnings reports, revenue growth, profit margins and broader economic factors such as interest rates and economic trends.
Delivery Trading
Delivery trading is a traditional method where securities such as stocks or bonds are bought and held for a longer term. In this approach, ownership of the securities is physically transferred from the seller to the buyer. Buyer intends to hold onto these securities for more than one trading day, often weeks, months or even years, with the goal of benefiting from long term price appreciation or dividend income.
Now you have a clear understanding of how many types of trading in stock market, it’s time to find what’s best for you and start practicing.
Online trading has simplified trading in the stock market. Now that you know the different types of trading, it's time to apply your knowledge to make gravity-defying profits. 5paisa’s free Demat and trading account can provide you with the best start. You can read the research report and expert recommendations to pick stocks and trade like a professional trader.
