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For most people, the full-form of the acronym is enough explanation for this strategy. Unlike intra day trading where you’re supposed to buy and sell stocks the same day (in one trading session), BTST allows traders to take advantage of short-term volatility for 24 hours – across two trading days.
In a world where stock traders are always trying to outdo each other and beat the market at the same time, any strategy that allows an edge over something else is highly in demand. For a lot of these traders, BTST is that edge.
In this article, we’re going to understand what BTST is in detail, how the strategy works, how you can make money from it, and what you should be careful of. Let’s dive right in!
What is the BTST strategy?
The BTST trading strategy is based on one simple principle – purchase shares on one day and sell them the following day for a profit. The strategy allows you to take advantage of overnight price differences in the stock market. When trading intraday, you’re forced to close your positions at the end of the trading session no matter how your investments are doing. Here, you’re allowed to keep them overnight and sell tomorrow, taking advantage of another day’s volatility.
BTST also allows traders to take advantage of the market without having to invest a lot of capital. For investors who have the money to take trades one day but not the next, the BTST strategy frees up their corpus the next day, ready to be used on another investment.
How does this work?
To understand how the BTST strategy works, you must first understand how stock deliveries work. Whenever you buy stock on an exchange, protocol dictates that those shares will be delivered to your demat account on the T+2 day – which means that shares bought on Monday will be delivered to your account only on Wednesday.
However, the catch is that you can sell those shares on Tuesday without taking delivery too. This is allowed. Suppose you do end up selling those shares on Tuesday before you receive delivery. Now, when Wednesday rolls along, the broker you’re using receives the shares you ordered. However, the broker also has to process the sell order you placed the previous day. Hence, as soon as these shares are received, they’re sold off and delivered to the buyer by Thursday.
All in all, a BTST transaction that was initiated on Monday and completed on Tuesday will get settled on Thursday – that is, T+3 days after the initial stock purchase.
What about the money?
When you buy shares on Monday, you pay full price. Suppose it amounts to ₹50,000. Hence, fifty thousand rupees get deducted from your account. On Tuesday, suppose you sell the shares for a cumulative value of ₹55,000. When you place the sell order, you instantly receive 80% of the sell value. In this case, that’s ₹44,000. This money can now be used on another trade on Tuesday. The rest of the money gets to your account by Thursday.
This is why BTST sales are so effective. It allows you to use roughly the same amount of capital to stay invested in the market for longer. Not only that, the strategy also lets you take advantage of overnight stock price movements, not to mention letting you hold your investments for two trading sessions instead of one.
Are there risks associated with BTST trading?
Like with any other stock market trading strategy, there are risks associated with BTST too. Here are a couple of them:
- Since you’re technically taking delivery of the stocks you invest in, you can’t use the broker’s margin to trade. Hence, any leverage you want in the trade has to come from your personal cash balance.
- According to SEBI regulations, traders engaging in BTST trading are required to pay a 40% (20% for buying and 20% for selling) margin before executing the trade.
- If the stocks you buy and sell fail to deliver on time, the whole process gets delayed. Hence, if the final buyer receives his stocks late, the exchange could penalise you for your BTST manoeuvre.
Using the BTST correctly
Here are some tips on how you can use the BTST correctly:
- Before a potentially favourable event – If you think that an announcement, event, or report could move stock prices up, use the BTST strategy to ride the price wave for more than one trading session before you sell. These events could be anything from a change in RBI policy to mergers and acquisitions.
- Monitoring opening and closing prices – Observe your candlestick chart closely during the close of the first trading session. Experts believe that most price action in the market usually occurs after 2 PM every day since that’s when big traders usually start settling their bets. Observe the stock’s price movement from 2 PM to 3:15 PM to gauge whether the stock will open higher or lower the next day.
- Use stop losses – Like with any other trade, use stop-losses to make sure you’re not losing more than you can afford on any one trade.
- Choose highly liquid stocks – If you’re buying and selling large quantities with BTST, you want to choose companies that are highly liquid on the market to make sure that you’re entering and exiting exactly at your targets.
Hence, BTST allows you to:
- Hold your investments overnight in case they appreciate after trading hours
- Research your stocks more as they’re pending delivery to your demat account. Hence, you have more time to put into assessing market conditions, news developments, and other factors that might impact the stock’s price.
- Use your capital more efficiently throughout the week by investing every day and selling every day.
However, there are risks associated with this type of trading too. Not only could you suffer losses overnight, you could also be liable to pay penalty fees to your exchange if share deliveries get delayed.
Hence, we encourage you to conduct your own research before using the BTST strategy and ensure that your broker allows such manoeuvers beforehand so you don’t have to pay any unexpected fees. Good luck!
Choosing between BTST and intraday depends on your time horizon and risk tolerance. BTST allows you to hold positions overnight, letting you capitalise on longer trends or news events. This involves overnight risk, while intraday trades are squared off before market close, eliminating such risk, but also potential gains.
Yes, BTST trading is legal in India, but it operates under specific regulations set by SEBI. Brokers maintain a list of securities that are eligible for BTST. Investors have to make sure that they understand the regulatory framework and broker rules before engaging in BTST trades.
While BTST can be profitable, it does carry risks. Price swings can lead to significant losses, especially if you’re using leverage. Margin calls can occur if the stock price falls, forcing you to deposit additional funds or face liquidation. Additionally, you also have to consider overnight brokerage charges and potential delivery charges if converting BTST to delivery.
Converting a BTST position to delivery is possible before the contract expires. This changes the trade settlement from BTST to regular delivery, which comes with regular delivery charges but eliminates the BTST settlement fees. Traders must weigh the risk and reward of this conversion based on their market outlook and holding intentions.
Margin requirements for BTST trades vary based on the broker and the individual security involved. Generally, you can expect margins to be around 50% of the entire contract value. Higher margins reduce risk but limit buying power. Make sure that you’re using margin cautiously and ensuring sufficient funds are available to meet potential calls.