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Different types of stock trade - Long-term trades, Positional trades, Intra-day trades

You should invest in stocks through positional, intra-day or long-term trades for both capital preservation and high returns

Every trade is an interesting game where each player has his own rules and still everyone plays together. But every player, before entering the trade, has to decide his strategy and game plan for that trade. Before going for a trade, ask this very basic question - what type of trade is this? At most, trades are classified as long-term, positional and intra-day.

1) Long-term trades

These trades are called investments. The primary goal of an investment is to preserve capital. The investment should be made based purely on the fundamental factors of the 'sector and the company's business' and a premature exit should be made only if there is a change in the fundamental factors before the price target is achieved.

A fundamental investment call should not be associated with 'stop-loss levels'. The daily price fluctuations should not raise your blood pressure as you should accept volatility as a part of the game. An investor should set realistic expectations of returns from the investments and hope to get the best, but should be prepared for the worst.

2) Positional trades

If your trade horizon is one week to a fortnight, you can make use of the science of technical analysis where the trading ideas are identified based on the technical factors. These are known as positional calls and are based on price and volume actions, and other trade statistics.

As positional calls may not be in sync with fundamental factors, while taking a position based on technicals, you should always make use of stop-loss levels. Positional calls should not be converted into long-term investments just because a stop-loss has been hit. At most, these ideas are given in multiple ways like stock market diary, awacs or derivative products.

3) Intra-day trades

Trades undertaken to be squared off at the end of the day are intra-day trades. All intra-day trades will always have stop-loss levels and they have to be followed strictly. These may not be in sync with fundamental calls and there can be a fundamental buy and intra-day sell, or vice versa. For the scrips on which intraday calls are given, there may or may not be any fundamental view.

Globally, it has been observed that trading based on the best of the technical tools will have a success ratio of not more than 60-70 percent. You should look for a favourable reward-risk ratio which is normally 2:1 - for an expected profit of Rs 2 you are accepting a risk of losing Re 1.

So, even a 50 percent success ratio may generate handsome returns. Always remember that trading without stop-loss is like driving without brakes. The table gives a clear picture at various success ratios, with each position taken expected to have a profit target of Rs 2 with a stop-loss of Re 1. So, even a 40 percent success ratio can yield good profits if stop-losses are clearly kept and targets properly defined. Intraday calls are given through market diary, awacs or derivative products.

Many investors take positions in equities without deciding the type of trade it is and thereby do not have clear exit rules. Hence, they sometimes sell their profit making stocks with very small movements in price just because of anxiety even when there have been no negative developments in the underlying fundamentals. Sometimes, they don't sell even when the fundamentals have changed drastically. Both the situations can lead to missed profit opportunities and losses. Judicious classification and planning of every trade can greatly enhance your investment experience by eliminating emotions and reducing risk.

After deciding the type of trade, many traders commit another mistake - changing the type of trade. If a stop loss is hit, he converts a day trade to positional and positional to investment.

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