If you’re looking to get into the world of online stock trading, it is extremely crucial to get to know the various trading strategies that need to be employed. This way, you can not only make more informed trading decisions, but also increase your chances of making profits. One such trading strategy that many traders like to use frequently is the directional trading strategy. Wondering what it is? Here’s an overview of what it is and how it can be used.
- What is the directional trading strategy?
Any trading strategy that bets on the market movement is known as a directional strategy. Since a trader basically bets on the market moving in one direction, be it up or down, such a strategy is referred to as a directional trading strategy. Here’s an example to help you understand better.
Let’s say that a trader firmly believes that the market would move upward in the near future. And so, the trader takes a long position on a stock. This long position that the trader employed on the stock is what is known as a directional trading strategy.
Generally, when dealing with directional trading strategies, traders tend to use options. This allows them to create spreads, which can effectively lower the losses in the event of the market not following through with the trader’s prediction.
- Are there different types of directional trading strategies?
Of course there are. Depending on the trader’s view of the future market movement, they can employ any one of the several directional trading strategies. Let’s take a look at a few of the most commonly used strategies.
1. Bull Call
The bull call strategy is often used by traders when they are of the opinion that the market or a stock would turn bullish in the near future. This directional strategy involves selling a call option with a higher strike price compared to the spot price and purchasing a call option with a lower strike price.
2. Bull Put
As with the bull call, the bull put is also used when traders believe that the market would turn bullish in the near future. However, in this directional trading strategy, traders sell a put option with a higher strike price and purchase a put option with a lower strike price.
3. Bear Call
The bear call is the inverse of a bull call. It is used only when traders feel that the market is about to turn bearish. This directional trading strategy involves purchasing a call option with a higher strike price and selling a call option with a lower strike price.
4. Bear Put
The bear put is very similar to the bear call. The only difference is that it uses put options. To execute a bear put, traders purchase a put option with a higher strike price and sell a put option with a lower strike price.
Conclusion
Now that you’re aware of directional trading, why don’t you give it a go? If you don’t already have an online stock trading account and a demat account, don’t worry. You can open one instantly with the help of Motilal Oswal. Visit the website now to open one for free.
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