Trading For Beginners: Top 5 Things To Know Before You Start

TYPES OF TRADING: Which Type of Trading is More Profitable?

Learn How many Types of trading are there and find out which type of trading is more profitable.

When it comes to trading there are a lot of possibilities that exist in terms of instruments to trade and timeframe to choose from, both of these aspects make trading a very flexible and diversified field of expertise.

In this blog we will briefly talk about types of trading and which type of trading you might be interested in based on your own expectations from trading.

Trading can be classified in following domains

1. Based on Instruments to trade
2. Based on Timeframe to trade
3. Based on Methods to trade

1.Based on Instruments to Trade

1.1 FOREX TRADING

Trading currency pairs is known as forex trading. It is the largest financial market of the world, according to the 2019 Triennial Central Bank Survey of FX and OTC derivatives markets volume of forex trading per day is almost equals to $6.6 trillion.

You can either trade currency futures or options, both types are usually available to trade, you can check currency pairs available for trading as provided by your exchange and brokers.

Check currency pairs available in india for trading here

Examples of currency pairs : GBPUSD , USDINR , EURUSD

1.2 COMMODITIES TRADING

Commodities are popular trading assets which are traded in commodity markets, these are the oldest trading assets in history of trading. Commodities are traded either in futures or in options, following are the most commonly traded commodities

Base Metals Gold, silver, copper, aluminum, lead, zinc

Energy Crude oil, natural gas,

Agri Commodities Cotton, mentha oil, palm oil, rubber

LiveStock live kettle, pork bellies , meat

Check commodities available for trading in india here

1.3 STOCK TRADING

Stocks are popular assets of trading , you can trade stocks in the primary market by buying stocks directly or you can trade them in secondary markets with the help of derivatives like futures and options.

Some traders also use a combination of both as hedging also, hedging is taking opposite positions in primary and secondary markets for risk control.

1.4 CRYPTOCURRENCY TRADING

In recent times the popularity of cryptocurrency trading has significantly increased, evolution of web 3.0 and decentralized finance possibilities has made cryptocurrency another great asset to trade.

Another advantage cryptocurrency trading offers is the possibility of trading 24/7, along with cryptocurrency and some other digital assets also coming into picture like NFT’s ( non fungible tokens) and other digital tokens.

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2. Based on Timeframe of Trading

2.1 Positional Trading

Positional trading is a longer time frame trading in which traders can open a position and hold it for a few days to few months, holding time may depend on a number of factors like system or based on technical picture.

Positional trading is for longer term objectives in which traders are looking to gain from longer price swings, positional trading requires less screen time but also requires patience as signals for positional trading are not generated as fast as other trading time frames.

Pros : Less Screen time, Less decision making, Slightly better probability of profits, Low brokerage, Better emotional consistency

Cons: Overnight position risk, High price swings, Less number of signals, Comparatively higher capital requirements

2.2 Intraday Trading

Intraday trading is opening position and closing position on the same day, Intraday trading which also refers to day trading is widely popular trading among traders, objective of intraday trading is to get benefit of daily swings and reduce overnight risk by squaring off the position same day.

Pros: Eliminated overnight risk, Quick profit booking, Higher opportunities to trade, Low capital requirement

Cons: More Screen time, Frequent decision making, high brokerage( frequent trades).

2.3 Scalping

Scalping is a term used for very short durations trades, which are usually closed within minutes of opening.

The Objective of scalping is to quickly book profit from a sudden momentum in price, scalping requires quick decision making and often requires more skill and experience to get a profitable outcome regularly.

Pros: Less risk per position, no overnight risk, Quickest profit booking, low capital requirement

Cons: Fast and frequent decision making, high brokerage due to high frequency of trades, high slippage

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3. Based On Methods Of Trading

3.1 Discretionary Trading

Discretionary trading method is trading without any technical analysis or system, discretionary traders can make trading decisions based on several sources as listed below:-

• News
• Events
• Tips
• Fundamentals

Another prominent example of discretionary trading is Random trading.

Random trading is the most commonly used trading method by beginners in trading, since without having proper knowledge about trading their decisions of buy and sell often comes from random thoughts, tips or anonymous suggestions and results in losses.

You might have heard about trading being a gambling, so random trading can be considered as one.

3.2 System Trading

As the name suggests, system trading is based on a well defined system, here system can refer to a set of rules, indicators, price patterns or formulas.

System trading removes the subjectivity of trading elements, it also removes the trading issues created due to emotional inconsistency.

Describing each type of systems for trading is a comprehensive topic, however for reference below are the main examples of system trading -

• Mechanical System Trading
• Trend Following
• Countertrend
• Pattern Recognition
• Price action trading

There are many more types of system trading methods, basically any method which allows trader to take decisions of Buy and Sell based on confirmation by a set of defined rules comes under system trading

3.3 Arbitrage Trading

When a trader takes advantage of price differences of same stock, commodity or currency in two or more different markets based on principle that eventually prices should match is called arbitrage trading.

Arbitrage trading is low risk low reward trading, the profit potential of a trade in arbitrage trading is the difference between prices of same stock in two different markets

For example if stock price of Apple in New York Stock Exchange is $100 and in Hong Kong Stock Exchange is $105, Trader can buy Apple stock in New York Stock Exchange and sell the same in Hong Kong Stock Exchange, making $5 profit

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Which Type Of Trading Is More

Profitable?

Trading is really "a game of endless possibilities", there are many possible ways to make money in trading, the further you learn about trading and start trading in live markets, the sooner you know that- at the very core of a successful trading is a Trading plan which is customized to your own perspectives and risk appetite.

Let us say you don't have enough time to look into the screen all day, this filters out two other timeframe based methods of scalping and intraday trading.

Similarly for example after trading for a while you start to notice a consistent issue of not booking your losses early, turning them into big losses, in that case you might want to change your approach to system trading and specifically to a mechanical one, which will eliminate the holding of bad trades.

Also from a wide range of assets available you might want to trade only less volatile instruments for emotional stability and tight stop losses.

This kind of filtering out process will take some time but once you have figured out what works best for you, That type of trading will be most profitable for you.

So the goal should be to try different types of trading and than choose what is best for you.