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Types of Trading
Market participants can be broadly classified into investors and traders. Traders basically focus on generating short-term income whereas investors try to create wealth through long-term investment positions.
The difference between a trader and an investor is that a trader analyses the market from a shorter-term perspective whereas an investor analyses the market from a longer-term perspective.
The process of buying and selling stocks to generate profits in a short period, i.e., usually within a month or two is called Trading.
A noticeable difference between the two acts is that investing requires thorough qualitative and quantitative analysis of a stock. We don’t exit unless there is a major change in the dynamics of that company.
In trading, however, we don’t analyse the quantitative or qualitative factors of a company, instead, we analyse the price action of a stock by studying the charts, patterns, indicators, etc.
Trading can be of three types:
1. Intraday Trading: In intraday trading, the securities which are purchased are squared off, on the same trading session. Intraday trading can be executed in Equity Stocks, Commodities, Currencies, Cryptocurrencies, etc.
2. Swing trading: The market moves in cycles. A person who doesn’t square off his positions on the same day and carries them on to the next few days is known as a Swing Trader. The main objective of swing trading is to capture the price swings of a stock and generate returns. Swing Trading can be of two types:
A. Short-Term: In short-term swing trading, the asset is purchased and sold within a few days. Usually, in less than a month.
B. Medium-Term: Swing trading for a medium-term is generally marked with a holding period of up to three months.
3. News-Based Trading: In news-based trading, a trader executes trades based on news/rumors on a stock. For example, when the Reliance-Future Group deal news floated in the markets, there were rumors about this deal several days before this deal was officially announced. A news-based trader would have acted on those rumors and squared off his position when the news became official and stock prices went up. The disadvantage of this method is that news/rumors aren’t always true, plus it is more like betting and less like trading. So trading based on the news should be accompanied by other studies to get a confirmation bias.