Learn with ETMarkets: How to use volatility to generate profits from short-term equity trading

However, in stark contrast to the traditional method of buying equity for the long term, short-term equity trading can be extremely beneficial for day or positional traders who use the implied volatility and associated price action to generate profits.

For long-term investors, volatility-induced market dips can be used to increase allocation in beaten-down stocks, only to sell the additional shares at higher levels while still maintaining the original positions.

Let us look at a few short-term equity trading strategies using which active traders can extract profits even in a volatile market environment.

Buying into beaten-down equities and selling higher:

For most retail investors, the most intuitive approach involves taking fresh positions in stocks that are either already a part of their portfolio or buying into large and blue-chip stocks that have corrected significantly in a bearish cycle.

When increasing allocation to stocks in one’s portfolio, investors would do well to identify the immediate support levels and buy into the dip with a small stop loss in place.

For new stocks that an investor is getting into, it is vital to choose fundamentally solid companies that have corrected in line with the broader equity market and invest with a time horizon of a couple of weeks to a few months at best.

This method can return sizeable profits when markets trend higher while also maintaining original holdings through any short-term volatility. Additionally, short-term positions can always be held for the long term in the event that the markets trend higher and surpass the previous all-time high.

Scalping profits from intra-day volatility:

Actively traded stocks or equities display short-term price movements that may or may not be in line with the underlying long-term trend.

Scalper or intraday traders make use of this volatility to enter and exit positions in particular equity and profit from these price movements in a matter of a few minutes or hours.

Usually involving making multiple trades, scalping is the art of trading key intra-day price levels and requires traders to be committed to their trading screens throughout market hours.

Relying on technical indicators rather than fundamental analysis, investors following this trading style aim to generate cumulative profits by sometimes making hundreds of trades in a single day. However, this is a rather risky approach and profits can be impacted by high brokerage fees incurred due to the high number of trades.

Trading the underlying momentum:

Stock price movements usually occur in waves and can offer many trading opportunities for traders looking to hold a position for a few days.

Known as positional trading, this approach involves spotting a temporary bottom in a stock’s price and taking a short-term position to benefit from any impending technical rebound in prices.

While positional traders usually do not make any price predictions, they rely on both technical and volume indicators to ride the stock’s underlying trend.

This style of trading involves far more research and experience to generate profits on a consistent basis. Traders identify breakout levels and enter into a trade only when the stock starts trading above it and exit once its price reaches the short-term resistance level

Most brokerages incorporate charting software on their trading platforms and using them effectively is part of the process in spotting these short-term trading opportunities.

Traders need to be disciplined about their entry and exit levels, calculate their risk in every trade and be careful to not overtrade, especially when on a losing streak.

While these concepts are applicable to a broad range of asset classes, short-term equity trading is quite common amongst savvy retail investors and can be combined with value investing to generate consistent profits from equity markets.

(The author is Managing Director of

Wealth Management)

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)