Having a solid trading Strategy is key to success in the Indian stock market. Without a method to approach the market, you will be shooting in the dark.
A trading strategy is essentially a plan of action for navigating financial markets and is constructed based on specific predefined rules and can be very simple or complex, depending on the rules applied or the range of assets (stocks, futures, options, currency derivatives) traded.
Formulating a trading strategy is necessary to ensure your chance at success in the markets. If you are wondering about the different types of trading Strategies out there, how to use them, and how to better understand them, then read on. We’ll go through all the basics in this post.
Table of Contents
- Types of Trading Strategies
- How to Choose the Right Trading Strategy for You
- Understanding Your Trading Strategy
- Conclusion
Types of Trading Strategies
A trader can choose how to frame the market with a trading strategy, or even combine multiple strategies (but this is recommended for more advanced traders). Not every strategy will work at all times, but it’s a good idea to have some way of structuring your approach to trading the markets.
Some of the most common trading strategies are as follows:
Fig 1: Some of the most common trading strategies.
- Day Trading
Day Trading is a strategy in which the trader purchases and sells securities within a single day, or perhaps even a single session (e.g. NSE trading hours – 9:15 am to 3:30 pm IST).
With this approach, a trader seeks to profit from fluctuations that occur throughout the day. Day trading eliminates the risk of gaps in opening and closing prices since all positions are closed before the end of the trading day.
Discover how Bookmap can take your intra-day trading to the next level. Watch our video featuring Bruce (Education Lead, Bookmap) and Urvashi (Lead, Bookmap India) for valuable insights.
- Scalping
Scalping is a trading strategy that focuses on making profits from small changes in price by buying and selling swiftly. Looking to scalp in the Indian market? Bookmap is the perfect tool for you.
This strategy requires a speedy internet connection and access to high-quality live data from the market. The good thing about this strategy is that even if it seems like the market has barely moved in a day, a good scalper could have still eked out a decent profit from the micro swings.
- Swing Trading
Swing trading is a strategy that incorporates entering and exiting trades over multiple days. Traders using this strategy are on the lookout for big swings in market prices, hence the name.
- News Trading
News Trading is based on judging market expectations of events and breaking market news. With this kind of strategy, the trader needs to consider the implications of the latest news and trade accordingly. The trader can also attempt to predict the impact of upcoming news events on the market.
While it is a good idea to have a general understanding of market fundamentals and macroeconomic factors, it isn’t absolutely necessary to understand deeply, since the idea is to trade around the price reactions to these events.
- Position Trading
Position trading is a strategy that involves holding a security for a much longer time than even swing trading, ignoring volatility. This type of trading might miss the potential profits with swings within the market but will reduce the stress of managing positions, instead trading with a clear target in mind.
- Algorithmic Trading
Algorithmic trading is when a strategy is automated, taking the element of human decision out of the equation. Algorithmic trading systems can be anything from market-making strategies that trade in and out in seconds, or trend following strategies that track multiple asset classes and hold positions for weeks and months.
- Trend Trading
Trend trading strategies play with the old adage slightly, making the idea to “buy high, sell higher” (and vice versa). Trend trading strategies attempt to catch the “fat tails” in financial market returns, but suffer from large drawdowns during choppy markets, making them hard to stick with even though the strategy rules tend to be quite simple.
Let us look at the perfect strategy for traders from different walks of life.
- For The Full-Time Office Worker
Individuals working full-time can find it challenging to keep track of every tick and piece of breaking news in the market. Considering that they have other commitments and have less time to dedicate to the screens, swing or position trading is the way to go.
Analyzing the markets in the evenings or on weekends and modifying orders means they will have the rest of their time to focus on their career.
- For The Gamer
Trading requires intense focus, and swift reaction speeds can be a huge advantage. Traders who love fast-paced gaming and are good at it might try their hand at scalping, day trading, or news trading. Considering that these strategies require quick-fingered decision-making under pressure, it can be a chance to put those years of gaming to good use.
- For The Programmer
For individuals who like to code and would be interested in taking up the challenge of applying their analytics skills to the global financial markets, algorithmic trading is a good approach to choose from. Crafting trading algorithms would mean the programmer is doing what they are good at, taking the difficulty of trading out of the picture and potentially even reducing cognitive biases.
Understanding Your Trading Strategy
Choosing a trading strategy can be tough for new traders because it will define their approach to the market for a long time. This is why it is essential to understand the various factors which can influence your decision of which trading strategy to go with. Here are a few considerations:
- Time Requirements
The amount of time available to dedicate to analyzing the markets and executing trades is vitally important when it comes to choosing a trading strategy. With a lot of time at hand, the trader can go for day trading, scalping, or news trading. With less available time, the trader is limited to swing or positioning trading.
- Costs
The cost of trading is also vital. If you want to day trade Indian stocks/options/futures/currency derivatives, you can open an account with Bookmap at 1399 INR per month to visualize the market before placing a trading order.
There can also be large differences between trading fees across asset classes and product types. Considering these and other costs are essential when choosing a trading strategy.
- Data
Trading in the financial market requires data to be studied and analyzed to make decisions.
There are also differences in the quality of data, with some data such as NSE Level 2 data offering extra insights (5 levels of best bid and ask) into the market. Considering this factor is necessary to decide upon a trading strategy.
- Equipment
Welcome to the digital realm, where trading can be done through online platforms on your laptop or even phone. But if you are going to be day trading multiple assets, for instance, you will probably need a high-speed desktop computer with multiple monitors (some traders have over 10)! Whereas if you are swing or position trading, your laptop might be enough.
Thus, equipment is a critical consideration to bear in mind when choosing a trading strategy.
- Risks and Other Considerations
All of the above considerations should tie in with other factors, such as the amount of risk capital you have, your financial status, whether you will be holding positions overnight, and how much leverage you will use.
Conclusion
Bookmap was designed for traders, by traders, and is meant to help you win in the Indian market. Whatever strategy you choose, make sure it is based on solid order flow principles! Ready to start trading with Bookmap India? Get started risk-free in our simulation environment and upgrade your trading strategy today.
Don’t miss out on our daily webinars starting at 12 pm IST. Join the discussion on building your own Nifty/BankNifty trading strategies using Bookmap’s order flow tools and price action analysis.
The post How to Choose a Trading Strategy appeared first on Trade Brains.
