Stock Market Basics

A Guide To Understanding BTST Trading

Learn about BTST Trading, a short-term trading strategy that allows investors to make quick profits through short-term volatility.

BTST Trading, also known as Buy Today Sell Tomorrow Trading, has gained much popularity among investors in today's equity market. It is an excellent short-term trading strategy that has the potential to earn good profits when executed properly.

In this article, we will discuss what BTST trading is, how it works, its strategies, and its advantages and disadvantages.

What Is BTST Trading?

BTST Trading is a trading strategy in which you buy a stock today and sell it the next trading day without taking delivery of the stock. It is neither an intra-day style-based trading, where you buy and sell the stock on the same day, nor a trade, where you sell after T+1 day of buying (T: The day when you buy a stock).

The investor is only interested in making quick profits through short-term volatility and does not want to hold the stock for longer. The sell order for this trade is executed somewhere in the middle of the two.

How Does BTST Trading Work In The Indian Equity Markets?

Let me give you a background on how Indian equity markets work today. India has recently shifted to a T+1 settlement cycle, where you will receive the bought stock in your demat account in T+1 day.

For example, if you purchase 10 shares of ITC on Monday, you will receive the stock on Tuesday in your demat account.

Before the recent update of T+1 settlement, Indian equity markets were following the T+2 settlement cycle, in which case you would have received the ITC stock on Wednesday.

So, when an investor purchases a stock today and sells it the next day before receiving delivery, it is called a BTST trade. The profit or loss will depend on the price difference between the two days.

How To Conduct a BTST Trade and What are its Strategies?

While executing the BTST trade, some of the essential steps and methods are as follows:

Select the CNC Order:

When executing the BTST trade, it's essential to select the CNC order and not MIS order. CNC order stands for “Cash and Carry,” which allows you to buy a stock today and sell it whenever you want.

However, with the MIS (Margin Intraday Square Off) order, you will have to close the position, which means selling the stock before the day ends. Hence, MIS is what you select for Intra trading.

Candlestick Chart Analysis:

It is generally recommended to analyze the stocks after 2 PM in the Indian equity markets. By then, most intraday traders would have closed off their positions, and the value of the stocks would have been reflected by then. That way, you have the latest stock value to decide to trade and execute your strategy.

You can use 15-minute candlestick charts to analyze the stock price trend and determine the entry and exit points. This analysis gives a good idea of the highs and lows and thus determines the resistance levels of the stocks.

If, after 3 PM, the stock breaks the resistance levels, you can assume that the stock will maintain the trend and follow the upward growth. If the stocks open at a higher rate tomorrow, you can put the sell order on the stock to book a profit.

Picking High Liquid Stocks:

Going after the high liquid stocks is essential. These stocks promise good volatility for the stocks to return profits in a short time frame and make it easy for us to sell the stock as there is always a buyer.

If there is no buyer for your stock, you might end up holding the stock, which will reduce the capital you have for trading.

Converting Intraday Trade to BTST Trade:

If you had placed an intraday order, the stock would automatically get settled (sold) at the market price at the end of the day.

If you find the trend in your stock to be promising, you can settle the stock tomorrow by converting the MIS order to the CNC order. You can easily check the instructions to do that with your broker.

Putting the Stop Loss and Target Price:

It is essential to set a stop-loss order to limit losses in case the market moves against the trader. The stop-loss order ensures that the trader exits the trade automatically when the stock price reaches a predetermined level, which helps avoid significant losses.

Similarly, the target price automatically executes the sell order to promise a good profit when the price of the stock follows the upward trend.

Suggested read: BTST: Active Trading Strategy

Example of BTST trade

Case A

Suppose you invest in SBI Bank by purchasing 100 stocks for ₹550 on Wednesday. You put the target price to be ₹560, and your stop loss is at ₹548 while placing this CNC order.

When the market opens on Thursday, suppose the SBI Stock opens at ₹558, which later climbs to ₹560, in which case your sell order will automatically get executed. This way, you will have a total profit of (560-550)X100 = ₹1000.

Case B

Suppose the stock has underperformed and opens at a value of ₹548, your sell order will automatically get executed, saving you from the possible downturn it is having

This way, your total loss will be (550-548)X100 = ₹200.

But what do you think will happen if the market opens at a lower value than the stop loss? Keep on reading to know more about it.

Advantages and Disadvantages of BTST Trading:

Advantages

It allows the investor to make a quick profit in a short amount of time.
It reduces the risk of holding a stock for an extended period.
It helps the investor to take advantage of the overnight news, events, and effect of the international markets, which can impact the stock price.
Since you are selling the stocks before it gets deposited in your demat account, you do not end up paying the Depository Charges (DP).

Disadvantages

It is a high-risk trading practice that requires experience and knowledge of the market.
It is not suitable for long-term investors.
It can result in losses if the market moves against the investor.
You might be subjected to a penalty due to short delivery as explained below.

What Are The Risks In Executing BTST Trades?

The BTST trading style is a high-risk trading practice. An investor can face losses if the market moves against them and they are not updated with current affairs. They might also have to pay the penalty to the exchange in case of Short Delivery. Let us understand these risks with small examples.

Example A

In the above example, imagine the market had opened at a value of ₹545, and the stock underperformed that day by following a downtrend. This might happen due to some unfavorable sectoral news like the recession or disastrous world news like the pandemic.

In this case, unless you manually set the new sell price, the stock won't get sold since the opening trading price of SBI is lower (₹545) than the short-position you had on this stock (₹548).

Example B: Short Delivery

As mentioned above, the SBI stock was purchased on Wednesday, which you would have received on Thursday (i.e T+1Day).

Before you are receiving the stock, you sell the stock (at a profit/loss) to another buyer on Thursday.

So as soon as your broker receives the bought SBI share on Thursday, it executes according to your next obligation, which is settling the same stocks to another buyer. This will be done on Friday.

However, suppose you fail to receive the stock on Thursday, then you won't be able to deliver the stock to the new buyer on Friday since you don’t have it. This results in a penalty on you, since you failed to deliver the promised stocks.

Parting Thoughts

BTST trading is a high-risk trading practice that can result in quick profits or losses. It is crucial to stay updated with current affairs and have a solid understanding of the market before entering BTST trades.

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