Money Market in India is a segment of the Indian financial market where the borrowing and lending of funds take place for the short-term. The maturity of the money market instruments precisely ranges from one day to one year. Reserve Bank of India is the body that regulates and looks after the Indian money market along with SEBI or Securities and Exchange Board of India.
Money market trading is taken up by active investors, who do not believe in holding a financial instrument for the long term. They believe that the profits from a financial instrument reside in actively trading it in the market.
There are 4 active trading strategies that are widely followed by investors and traders out there in the market.
- Day Trading: Day trading is one of the most popular and well-known active trading strategies. As the name suggests, day trading is the activity of buying and selling the securities within the same day. In day trading, the positions are closed out during the same day when they are taken. None of the positions are held overnight when talking about the day trading strategy. Day Trading strategy is taken up only by professional traders including specialists, speculators, and others.
- Position Trading: Many of the traders consider position trading as a buy-and-hold strategy and not as an active trading strategy. However, if it is done by advanced professional traders then it is referred to as a form of active trading strategy. In position trading, long term charts are used on a daily or monthly basis or in combination with other methods. These are used to determine the trend of the current market. These types of traders depend on the trend and hence these trades might last from some days to several weeks or longer. Such traders are called trend traders. They ride and jump on the wave by looking for higher highs and lower highs. The aim of the trend traders is to benefit from both the upward and the downward movement of the market. They look and determine the direction of the markets but do not predict or forecast the price levels. They exit the position when the trend they were riding on breaks. This indicates that when the markets are volatile, trend trading positions are reduced as trend trading becomes difficult.
- Swing Trading: Swing traders enter the market when the trend is seen breaking. When the trend comes to an end, there is seen a certain level of price volatility. This happens because the new trend is trying to establish itself. Swing traders come into the picture when the trend is seen breaking and buy and sell the stocks when the price volatility sets in. Swing traders are the trades that are held for more than a day but has a shorter time compared to the trend trades. The swing traders set new trading rules that are based on both fundamental and technical analysis of the stocks. These rules that are set by swing traders help to identify the right time to buy or sell a stock. The swing trade rule or algorithm need not be perfect in predicting the peak or valley of the price movement, but it should always be based out of a market that is proceeding in a single direction.
- Scalping: One of the quickest strategies that are taken up by active traders every now and then is scalping. It is based on exploiting the price gaps. The strategy of scalping works by buying at the bid price and selling at the asking price in order to receive the difference between the two prices. The stocks bought under the scalping strategy are held for a shorter duration to reduce the risk associated with the following strategy. Traders involved in scalping take advantage of small market movements that occur frequently. They always look for liquid markets so as to increase the profits as the profits earned per trade are low. They like quiet markets and do not submit to price movements.
Though there are four different active trading strategies mentioned above, an active trader can take up either one of the strategies or a combination of the above-mentioned strategies based on their financial goals and requirements. The cost and risk associated with each of the strategies mentioned above should be analyzed before-hand.