Basic Ins and Outs of Trading

Trading can look very different depending on who’s doing it and what they’re trying to achieve. It is a versatile practice that engages different techniques as per the requirement of the investor. Simply put, trading is about buying and selling financial assets, like stocks, currencies, or commodities, to make a profit from price changes. The main trading styles differ in duration of trade cycles, the frequency of decisions, and the risk taking ability of the investor.

Day trading or intraday trading involves buying and selling of stocks within the same day. Day traders conclude their trading within the same day, sometimes holding their stocks for hours or mere minutes, in order to avoid overnight market risks. The aim is to take advantage of small price fluctuations which requires watching the market closely and making quick decisions. There are no overnight risks involved and the results are quick but it is time-intensive and requires one to monitor the market closely. The transaction fees imposed on trading could also add up quickly. This style is usually suitable for full time traders and finance professionals like market analysts.

Swing trading involves holding stocks for a duration of several days or even weeks, aiming to profit from short-term trends. The objective is to derive profit from the “swing” or price fluctuations that occur during uptrends or downtrends. It is relatively a stabler type of trading but still involves risk. There is more breathing room to think through decisions rather than reacting instantly. However, it is susceptible to overnight and weekend market risks and profits take a longer time to realise. This style is suited for office workers, teachers and graduate students as it can be planned after a day of work or on weekends. 

Position trading is a long term trading technique wherein traders hold stocks for months or even years. Smaller price fluctuations are negligible and the focus is on long term macroeconomic trends, company performance, economic conditions etc. This style requires in-depth knowledge of the stock market and involves analysis of the market trends, thus it demands discipline and confidence. It is the least time consuming style and there are fewer trading costs as trades are less frequent. However, it can leave capital tied up for longer periods of time and the feedback on whether decisions are right or wrong is very slow. It is best suited for executives, managers and business owners and individuals who have busy schedules. Most large hedge funds prefer this style as this is a long term strategy. 

Scalping, on the other hand, is a high-intensity approach that involves buying and selling of stocks within minutes, in order to take advantage of small price fluctuations. Multiple trades are carried out within the same day and the objective is to make tiny profits. Due to the time constraint, this style requires sharp focus, quick execution, and strong risk control. There is minimal exposure to large market moves and this style can compound quickly with consistency. On the downside, small mistakes can wipe out many wins and it requires quick execution and advanced tools. It is usually taken up by professional traders and individuals who enjoy intense focus due to its speed-intensive nature.

Momentum trading involves buying and selling and selling stocks based on their recent strong performance. This trading strategy relies on predicting future market conditions based on past performance. Thus, traders buy assets rising in price and sell those which are declining and aim to benefit from the continuation of the trend. This strategy requires analysis of the market to identify assets with significant upward or downward momentum. This style is usually taken up by finance professionals and business analysts as it requires in-depth knowledge of the inner workings of the market.

*Disclaimer: The post is simply designed to educate individuals about assets and their workings. The platform does not endorse any specific asset and does not provide financial or investment advice.