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What are Directional Trading Strategies

Traders use various strategies while trading in the stock market or with different asset classes. Trading strategies that are made use of generally suit the purpose of the trader in question. As many trading strategies as there are, there are traders with a range of trading goals. Directional trades are those trades conducted by employing directional trading strategies. These work on the simple premise of a trader’s evaluation of the direction of a stock. 

  • Understanding Directional Trading Strategies

When a trader indulges in trading and investing, based on the sole indicator of the direction of a stock according to a trader’s view of where the stock will go, the trading technique is called directional trading. Simply put, the trader is essentially determining a trade by betting on the upward or downward movement of markets, or of a specific security. This trading strategy is broadly linked with options trading. This is due to the fact that many strategies can be utilized to capitalize on higher or lower moves, either in the wider market or a given stock. A basic directional trading strategy can be put into action by traders taking a long position if they find that the markets or any specific security is rising. On the other hand, they hold a short position if they find the markets are falling (or a security is). 

  • How Traders Profit - An Example

This trading tactic is simple to follow with an example. Say a trader is bullish about a particular stock ‘X’. This may be trading at Rs. 1,000. However, the investor expects this to go up to Rs. 1,500 in the next, say, three months. The investor buys 100 shares at Rs. 1,000, with a stop-loss at Rs. 800. This is a safeguard in case the stock changes its direction veering towards the side of loss. If the stock gets to the target price of Rs. 1,500, the investor will make a substantial profit. 

  • Various Directional Trades

Directional trading strategies have their pitfalls, in case stocks suddenly reverse directions. In stock market online trading, traders have tried to formulate certain ways of guarding themselves in order to mitigate losses. The ways that traders safeguard themselves are explained briefly below:

Bull Calls - When traders believe that the market as a whole will rise, traders make bull calls, buying call options with lower price hit rates and selling at higher strikes. Call options are options to buy stocks at a predetermined price or before a certain date. 

Bull Puts - Here, when traders expect a stock to climb, they use puts options instead of call options. They buy puts options thinking that stocks will rise. A put option is an option to sell stocks at an agreed rate or before a stipulated date. 

In the Right Direction

No matter what reading strategy you employ, your goal should be profit, either for the long-term or the short-haul. Making any investment work for you is the key to becoming a good trader, and you can find ways to do so at Motilal Oswal.

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