How to Shortlist Stocks for Short-Term Trading in India?
The traditional strategy for investing in the stock market is “Purchase and Hold,” in which equities are bought and held for days, weeks, months, or even years.
However, the alternative strategy of short-term swapping is also gaining popularity as a result of the introduction of financial news services and access to insightful data on financial and market indicators.
In short-term trading, stocks are often bought and held for a few minutes or hours. It takes advantage of the market’s uncertainty to reap the greatest returns.
What is Short-Term Trading?
In short-term trading, a position is taken that may last a few seconds or several days. The more conventional buy-and-hold strategy, in which you would keep a position for weeks, months, or even years, is replaced by this one.
Instead of considering an asset’s long-term fundamentals, short-term trading mostly concentrates on price movements.
This trading strategy looks for market volatility following significant economic data releases, corporate earnings, and political events to profit from sudden changes in market prices.
Due to the significant differences in style between short-term trading and the approach of purchasing or trading passive funds, short-term trading is also known as active trading.
Since it is typically focused on prediction, auctioning the underlying assets is not always necessary. Conversely, short-term traders choose derivative products because they allow them to make exit deals without really owning the underlying asset.
How Can You Begin Trading in the Short-Term?
If you wish to begin trading short-term, you should:
- Decide what kind of short-term trader you want to be.
- Find out which markets you can trade in shortly.
- Select a short-term plan of action.
- Utilize a demo account to test out your technique.
- To trade on live markets, create an account.
What Kinds of Traders Operate in the Short-Term?
Depending on their time limits and level of risk tolerance, short-term traders can select from a range of distinct approaches. Which are:
Scalpers open positions lasting anywhere between seconds and minutes, but typically not more, to profit from slight price swings.
By initiating a transaction and withdrawing it as soon as the market shifts in their favor, or “scalping” gains off the top of a market trend, a scalper will attempt to make tiny profits as regularly as needed.
It goes completely against the notion of “can let profits flow.” In able to preserve a high win-to-loss ratio, these traders quickly take profits and cut losses.
Scalping requires a lot of time and is not recommended for part-time traders.
This approach can be profitable but unsafe for traders wishing to engage in short-term transactions. It’s critical to be conscious of the charges associated with slamming shut trades to prevent your profits from being negatively impacted.
Day traders buy and sell securities during a single trading day, frequently to save money on overnight expenses.
This trading strategy is categorized as short-term since it aims to profit from minute changes in the market by transacting often throughout the day.
With this approach, choices must be made rapidly to enter and exit trades successfully. Large-scale volatility can occur even during a single trading day, which is necessary to produce a favorable trading environment but also creates risks to be mindful of.
Conversely, many other short-term trading strategies are willing to let positions run if needed, unlike day traders who close their holdings at the end of each day.
Swing investors concentrate on entering a trade during a longer trend, which may run for several days or weeks. Since it also capitalizes on medium-term swings, it is the longest form of short-term trading.
Swing traders will try to identify a trend and profit from price fluctuations in the broad price movement. To decide on the entry and exit positions for each trade, they frequently turn to technical analysis.
Although no set timescale restricts swing trading, it is nevertheless categorized as a short-term trading method. Therefore, in theory, it may also be categorized as a long-term trading technique since the trend might persist for more than a few weeks.
Short-Term Stocks: What Are They?
Financial instruments that are traded often are a part of short-term stocks. In other words, unlike long-term equities, these financial instruments are not kept by investors for an extended period.
Financial instruments held for less than a year or 12 months are referred to as short-term stocks in India. The gains from trading these instruments are therefore categorized as short-term capital gains.
What Markets Are There for Short-Term Trading?
You can trade in a range of marketplaces throughout the short term.
The trading strategy has few restrictions on how long you can retain a position open, from seconds to weeks, thus your technique isn’t necessarily affected by the opening hours of a market.
Your decision will depend greatly on your unique desires and tastes.
A few well-liked short-term trades are:
Because there are so many currency pairings accessible for trading 24 hours a day, five days a week, the forex market may be the most well-liked short-term trading market.
Due to the market’s well-known extreme volatility, short-term traders have several possibilities to go long and short on currency pairs. The market is also renowned for its high liquidity, which facilitates speedy entry into and departure from positions.
If you use a short-term strategy to trade forex and keep positions open for more than a day, you will be charged a rollover fee.
On stock exchanges around the world, thousands of shares are accessible for trading. Share trading is so prevalent with both long-term and short-term traders because of the enormous diversity.
Stock markets are a favorite for people wishing to trade short-term even though they do have fixed trading hours, suggesting there will be less volatility after hours. You could either maintain positions for a few days or use a day trading approach, closing deals out at the end of each day.
Additionally, keep in mind that some brokers do provide after-hours share trading. Trading, meanwhile, offers the opportunity to go both long and short on the price of shares, making it more suitable for usage in the short term.
Since market hours are still capped, short-term trading indexes would follow a similar pattern to share trading.
To focus on intraday swings, you would therefore either try to adopt a day trading approach or try to hold onto a position for a few days to a week.
When trading indices, you would speculate on the stock of a variety of diverse companies instead of one particular company. This increases your exposure to the market significantly, but it also implies that there are a lot more things that could affect your position than before.
It’s important to keep in mind that we also offer a few weekend indices markets in addition to our after-hours forex and stock markets.
Since the bitcoin market is open every day of the week, there are many opportunities for short-term traders. Short-term traders can try to profit from the fascinating market fluctuations that the unpredictability of cryptocurrencies like bitcoin causes.
The cryptocurrency market is still relatively young, so it’s even more crucial to have a good understanding of the asset and how to trade it. As with any market, it’s critical to have a suitable risk-management strategy in place before starting to trade.
You can adopt a shorter-term perspective on a variety of assets, including oil, gold, silver, wheat, and sugar, by trading commodities.
Trading commodities operate similarly to trading indices in that you are charged a funding fee for holding positions overnight.
Treasury bills, which are granted by the central government, are sovereign financial instruments. The bill market, a form of money market, is where these bills are traded.
Because this kind of financial instrument is guaranteed by the federal government, it ranks among the most secure short-term stocks. Investors are guaranteed against loss, and it is unaffected by market swings.
Auctions decide the price at which investors purchase Treasury bills. Income in this case refers to the discrepancy between the instrument’s market value at maturity and the purchase price established through auctions.
Generally speaking, there are three different types of Treasury Bills, each with a different maturity period:
- 91-day treasury bill
- Treasury bill for 182 days.
- Treasury bill for 364 days.
Despite being safe investments, Treasury bills only offer average returns.
We can Identify Stock for Quick Trading.
The market has a large number of stock options, making it impossible for one investor to invest in each one.
Before selecting the greatest stock for investment, make informed comparisons and cautious selections of your possibilities.
Before selecting any stock, it can be a smart option to set goals, keep an eye out for emerging businesses, look at corporate presentations, and keep an open mind.
A Few Guidelines for Better Stock Option Selection.
Pay attention to the business with the simple business model. It necessitates having a solid grasp of the industry.
Before investing, think about a reputable company because you might get better returns. Many people invest in reputable companies, increasing the likelihood of larger profits.
Invest in businesses that are “best in the breed.” Therefore, first, understand the distinction between a brand and a best-in-breed company.
The brand is more than just a name in retail rather than an investment. But it dominates the retail sector. Many industries in the market are thriving despite having no recognized brand.
In this case, you must concentrate on the performance. Any business could start expanding at any time on the stock market.
Investors are reluctant to put money into businesses that have previously disappointed shareholders.
Always keep an eye on the historical performance of the businesses you are considering investing in.
Small-cap companies have a lower possibility of expanding than large and mid-cap companies. Set mid-cap and large-cap firms as your top preferences.
Because of their higher returns, large and mid-cap corporations are referred to as the “best of breed” businesses.
Ensure a company pays out generous dividends to its stockholders before investing in it. You won’t get superior profits by consistently investing in large corporations.
Companies that pay dividends can grow and carry on with business while giving back some profits to investors.
In the past, it has always been recommended to buy equities when they break out. However, it is currently advisable to acquire stocks at the lowest possible price or before they get out of your price range.
To achieve a good return on your investment, concentrate on expanding businesses. Nobody can correctly forecast the frequent variations in the stock market.
Do thorough research and grasp the tactics that can help you profit before investing in any stocks.
Given the popularity of ETFs (Exchange Traded Funds), purchasing individual stocks appears to be out of style.
Who Should Think About Buying Stocks for Short-Term Investment?
Based on their financial goals and risk tolerance, different individuals decide whether to invest in short-term equities.
Investors might think about investing in non-market linked or fixed-income financial instruments if they desire to retain a stable income flow without taking on the risk of losing money on their investments. Because these securities contain the guarantee of repayment with a certain level of interest when the scheduled maturity time has passed, it enables people to store their extra funds and enjoy capital growth on it without suffering any losses.
Investors might think about buying equity shares if they would rather exponentially increase their capital while accepting the chance of capital loss. However, people must be well versed in the stock market’s characteristics to obtain short-term capital gains rather than losses.
To equalize the risk and yield components, people should preferably distribute their investments over a variety of short-term investment possibilities.
Benefits of Buying Short-Term Stocks.
With the use of these financial tools, people can increase the returns or profits they get from their extra money while still being able to cover any immediate financial needs.
Other short-term investment choices, except equity shares, offer a stable and safe source of income.
Equity shares short-term investments guarantee a notably high yield or gains.
All financial instruments for short-term fixed income have a low to negligible risk profile.
Investing in Short-Term Stocks has Drawbacks.
All other investment options offer modest income, except stock shares.
Due to market volatility, these investors incur the risk of losing their investments when dealing in equities shares.
Investors should therefore carefully assess their goals and choose short-term investment opportunities suitably.
To reduce risk, those who are new to investing in securities might think about fixed-income securities.
On the other hand, those with extensive knowledge can purchase equity shares to guarantee a higher scale of revenue from their surplus income.
How to Pick Stocks for Short-Term Trading: Techniques Involved
Simply said, a trading strategy is a mechanism for determining profitable entry and exit locations for trades. It specifies approximately when you will trade and when you will either close your deal to realize a profit or avoid further losses.
The majority of short-term trading methods are based on technical analysis, which uses a wide variety of indicators to help traders discover these important price levels to trade at.
Typical short-term trading tactics are:
Using Moving Averages as a Base
The premise underpinning momentum trading is that if there is enough force behind a recent trend, then this trend is prevalent. Momentum trading involves buying and selling assets based on the strength of the trend.
If a price has been rising recently, other market participants will take notice and drive the price even higher. In a similar vein, if a market price starts to decline, further short sellers will enter the market, further lowering the price.
The average price of a stock over a predetermined amount of time is known as a moving average. The moving average appears on the chart as a line that slopes upward in bullish markets and downward in bearish ones.
Moving averages with a longer period are typically referred to as slower-moving averages, whilst moving averages with a shorter period are referred to as quicker moving averages.
An approach for choosing stocks can be employed when these two lines intersect since they produce a signal for purchasing or selling.
Based on Business Cycle Theory.
This is a more basic method of choosing stocks for trading in the short term. Every business that focuses on a seasonal product experiences a certain cycle in its revenue.
This type of study, which is centered on a company’s sales, profitability, and other factors, can be used as a short-term analysis of stock selection criteria.
Using a range.
The market’s movement is recognized to be followed by many of the stocks that are listed there. When the markets appear to be headed for a bull run, these can also be utilized for short-term investments.
A slump in the markets may have just ended, but essentially, little has changed in the markets at this point. In these situations, picking a stock that closely follows the index might be a profitable move.
Understanding the levels of support and resistance.
The understanding and mapping of the upper price and lower price band between which the stock prices typically swing constitute another technical method for selecting stocks.
This can be helpful for assets that are only held for a week or two weeks. These two levels can be used to enter short-term trades and serve as the stocks’ “support” and “resistance” levels.
Candlestick Patterns for Reversal Analysis
The foundation of the reversal trading method is predicting when a current trend will reverse itself. Since it is merely a shift in market sentiment, a reversal can happen in either direction.
This is another method of selecting stocks for quick trades that are based on technical analysis. In this, you follow candlestick patterns to look for a change in the direction of the current trend. Reversal simply refers to a shift in direction in the opposite.
A reversal technique detects when a stock is ready to shift its path from upward to downward or downhill to upward as most stock markets only have two fixed directions, up and down.
A candlestick is essentially a chart made of candles, which are bar-like forms with lines at the top and bottom that show the movement of the stock price.
The price movements of security, derivative, currency, or commodity are marked on a candlestick chart. In a candlestick chart, the information for all four significant candle levels, open, close, high, and low, is contained in the formed candle.
Anticipating when the price of the stock or investment will reverse might be aided by a preset candlestick sequence.
Reversal patterns abound, including the bullish morning star, bullish hammer, shooting star, three-white soldiers, and bullish harami. These patterns serve as predictors of price reversals in the stock market and can guide your trading decisions.
For short-term traders who can recognize the most favorable price levels, concentrating on the impending price reversal might result in swift winnings.
A frequently used method to determine whether the market has beyond recognized retracement levels and is in a full reversal is the Fibonacci retracement.
Trading a Breakout.
Another well-liked strategy that mostly applies to short-term trading is the breakout trading approach. In this, anytime there is a dramatic change in trends, a trader will enter the market.
A trader will enter just at the instant when volatility is triggered to ride the wave and maximize returns.
In breakthrough trading, the Money Flow Index (MFI), which calculates the amount of capital flowing into and out of an asset over time, is the primary metric that is closely examined.
One of the key components of effective trading is risk management. Risk is a part of short-term trading, thus it’s important to reduce risk and increase return.
To hedge against market reversals, sell stops or purchase stops must be used. An order to sell a stock once it reaches a specific price is known as a sell stop.
When this price is reached, a sell order at the going rate is issued. The opposite is a purchase stop.
When the stock rises to a specific price, at which point it becomes a purchase order, it is utilized in a short position.
These two are made to keep your downside to a minimum. In short-term trading, you should aim to set your sell stop or purchase stop within 10% to 15% of the price at which you bought the stock or started the short position.
The goal is to limit losses so that gains will be much greater than the unavoidable losses you suffer.
What to Consider Before Beginning Short-Term Trading?
There are a few things you should be aware of before you begin short-term trading because they could have a serious influence on your positions:
Technology for Pricing and Execution.
Because of the rapid execution required to initiate and exit positions, short-term trading does have some technological limitations. Fast execution can mean the difference between success and failure in short-term strategy.
This is why it’s crucial to choose a platform designed expressly to provide you with speed, stability, and the lowest pricing.
Best Stocks for Short-Term Trading
Although investing in the stock market might be dangerous, for most seasoned traders, it can be a source of income.
Many investors lack patience, and short-term equities are alluring to trade-in based on individuals’ goals and available funds.
Short-term stocks might be a useful investment option if investors keep their goals in mind and take prudent action to achieve them.
Best Stocks for Short-Term Trading in India
Senior investors will nearly always place their bets on companies whose equities are expected to do well over the long term to maximize their rewards.
These stocks can be acquired over an extended period by purchasing during price drops and accumulating additional shares until they eventually turn into profitable equities.
The greatest short-term stocks do play a significant role in investments for various types of investors, according to the same experienced traders. Often, you buy short-term stocks to sell them in the next three to twelve months.
These are beneficial because they give your financial portfolio a respectable boost in the short term. You receive reliable returns from them quickly.
You can leverage the good profits from short-term equities to reinvest in long-term, higher-yielding stocks.
The Top Short-Term Picks for 2022
Some stocks that you can stick onto for a long time may surprise you by also providing you with large short-term profits.
Simply put, it depends on how long you want to keep them. For instance, investing in Infosys stock will yield excellent returns if you hold it for 6 to 12 months, but if you hang on for longer, you will undoubtedly make more money.
Here are the top stocks to buy now through 2022:
- Realty firms: Prestige Estates, Sunteck Realty, and Oberoi Realty.
- pharmaceuticals: Cipla Ltd., Max Healthcare Institute, and Gland Pharma.
- Banking: SBI Bank, ICICI Bank, and Axis Bank.
- Technology: Tata Consultancy Services and Tech Mahindra.
Trading in the short term can be a viable strategy for making money. Many people make their living by engaging in short-term trading. But to be successful in short-term trading, you must have a thorough understanding of how the market and economy work.
You must select the appropriate instrument in addition to the appropriate short-term investment plan. In certain situations, shares are the ideal trading tool, while in other situations, futures and options can support your trading strategy.
Traders might benefit further from understanding fundamental, technical, chart, and historical data analysis.
Fundamental analysis refers to quarterly results and corporate financials, whereas technical analysis keeps track of historical stock price movements, trading volume, etc. to provide a more accurate picture.
Your risk tolerance is a crucial factor to consider when selecting transactions. Always trade within your risk tolerance, and practice good trading hygiene, which entails adhering to stop-loss orders and other fundamental investing principles.
Additionally, it is advised to have enough capital. Trading in the short term is not a risk-averse strategy.
The trader will be less likely to experience mental distress and financial hardship in the event of a loss and will be better prepared to handle unforeseen events if they have enough cash.
To invest for a short period in the markets, you can also seek the assistance of a SEBI-registered investment advisor, who can advise you on the most suitable solutions for you.