BTST & STBT Trading 101: A Beginner's Guide to Overnight Profits

Ram: Hey Shyam, have you ever tried your luck in trading? I've been thinking about trying either BTST or intraday.

Shyam: Yeah Ram, I've done a bit of both. Intraday can be intense, quick gains but stressful. BTST gives you a bit more time to breathe.

Ram: Stressful, huh? I'm not sure I want to be glued to the screen all day. Tell me more about BTST.

Shyam: BTST or STBT Trading involves holding stocks overnight and selling the next day. Less time commitment compared to intraday, but you still need to watch the market closely.

Ram: Interesting Shyam. Any success with either of them?

Shyam: It varies. Intraday can give you immediate returns, but it's riskier. BTST is a bit more relaxed, and if you can catch overnight trends, it can be profitable too!

Ram: What about market volatility? Does it impact both similarly?

Shyam: Volatility affects both, but intraday is more sensitive. News during the day can drastically change stock prices. BTST allows you to react to news after market hours.

Ram: Got it. Considering our work schedules, which one do you think aligns better with our routine?

Shyam: Honestly, it depends on how much time you can spare during the day. Intraday demands more real-time attention. BTST might be a more practical choice for our schedules.

Ram: Makes sense. I'll look into BTST, then. Thanks for the insights!

What is BTST Trading?

BTST, or Buy Today Sell Tomorrow, is a trading strategy in the stock market where a trader buys shares on a particular day and sells them the next trading day.

This strategy allows traders to hold positions overnight without violating the rules of T+2 settlement, which means the delivery of shares must be made within two trading days from the date of the transaction.

Here's a basic overview of how BTST trading works:

Buying Shares: On a particular trading day (Day 1), the investor buys shares of a stock with the expectation that its price will increase in the very short term.

Holding Overnight: Instead of selling the shares on the same day, as in intraday trading, the investor holds onto the shares overnight and sells them on the next trading day (Day 2).

Capitalizing on Short-Term Movements: The goal of BTST trading is to capitalize on short-term price movements that may occur overnight due to various factors such as corporate announcements, global market trends, or other news events.

Risk Considerations: Holding positions overnight introduces an element of risk, as overnight news or market developments can impact stock prices. Traders often use risk management tools, such as stop-loss orders, to mitigate potential losses.

Compliance with T+2 Settlement: It's important to note that BTST trading complies with the T+2 settlement cycle, meaning the delivery of shares must be made within two trading days.

Traders need to ensure they have the necessary funds or shares in their accounts to meet settlement obligations.

let's walk through a simple example of BTST (Buy Today Sell Tomorrow) trading:

Day 1 - Buying Shares:

• You identify a stock, let's call it XYZ Ltd, with strong upward momentum and potential for short-term gains.

• On Day 1, you decide to buy 100 shares of XYZ Ltd at the current market price of ₹150 per share. Your total investment is ₹15,000.

Overnight Hold:

• Instead of selling the shares on the same day (intraday), you decide to hold them overnight, anticipating positive news or continued bullish momentum in the stock.

Day 2 - Selling Shares:

• On the next trading day (Day 2), the market opens, and XYZ Ltd experiences a surge in price. The stock is now trading at ₹160 per share.

• You decide to sell all 100 shares at the current market price, realizing a profit of ₹1,000 (₹160 - ₹150) on the trade.

Profit Calculation:

• Your initial investment was ₹15,000, and you sold the shares for ₹16,000. After deducting brokerage fees and other transaction costs, your net profit might be, for example, ₹980.

In this example, BTST trading allowed you to benefit from the overnight price movement in XYZ Ltd.

It's important to note that success in BTST trading depends on market conditions, the stock's behavior, and other factors influencing short-term price movements.

What is STBT Trading?

STBT, or Sell Today Buy Tomorrow, is another trading strategy similar to BTST in the stock market.

In this strategy, a trader sells shares on a particular trading day and buys them back on the next trading day.

Similar to BTST (Buy Today, Sell Tomorrow), STBT involves holding a position overnight, but in this case, the initial action is selling rather than buying.

Here's a basic overview of how STBT trading works:

Selling Shares: On a particular trading day (Day 1), the investor sells shares of a stock with the expectation that its price will decrease in the very short term.

Holding Cash Overnight: Instead of holding the shares overnight, as in BTST trading, the investor holds cash overnight, having sold the shares on the first day.

Buying Back Shares: On the next trading day (Day 2), the investor buys back the same number of shares they sold on the previous day. This completes the transaction.

Capitalizing on Short-Term Declines: The goal of STBT trading is to profit from short-term declines in the price of the stock. Traders may use technical analysis, market trends, and other factors to identify stocks that are expected to decrease in the very short term.

Risk Considerations: Similar to BTST, STBT trading involves holding positions overnight, introducing an element of risk. Traders must be aware of potential overnight news or market developments that could impact stock prices.

Compliance with T+2 Settlement: STBT trading also complies with the T+2 settlement cycle, meaning the delivery of shares must be made within two trading days. Traders need to ensure they have the necessary funds or shares in their accounts to meet settlement obligations.

Both BTST and STBT trading strategies require careful consideration of market conditions, risk management, and a thorough analysis of stocks. These strategies are more suitable for experienced traders who are comfortable with short-term trading and can closely monitor market movements.

Popular BTST/STBT Trading Strategies

Here are some popular trading strategies: 1. Breakout Trading

BTST traders maximize gains by capitalizing on price movements during the purchase day, strategically anticipating and riding sustained momentum, thereby aligning with favorable market trends.

2. Event-Based Trading

Within BTST, traders strategically position themselves by buying before major market events, leveraging short-term price volatility for potential gains arising from impactful occurrences.

3. Liquidity-Focused Trading

In the BTST landscape, traders prioritize highly liquid securities to ensure seamless transactions, facilitating quick and efficient buying and selling within the short timeframe characteristic of this trading strategy.

4. Support-Resistance Trading

Support and resistance trading involves identifying key levels on a price chart where the price has historically had a tendency to stop or reverse. Traders use these levels to make decisions about entering or exiting trades.

Advantages of BTST/STBT Trading

These are the advantages.

1. Quick Profit Opportunities

BTST trading lets you take advantage of short-term market changes, making it a good option for those looking for swift gains.

2. Dividend Eligibility

Holding BTST positions for more than a day makes you eligible for dividends, offering an extra income source.

Disadvantages of BTST/STBT Trading

These are the disadvantages.

1. Higher Risk

BTST trading comes with risk due to unpredictable market changes, potentially leading to quick losses.

2. Extra Brokerage Charges

Selling BTST might result in added brokerage charges, impacting overall profits. Be aware of these costs in your decision-making.

Precautions Required in BTST/STBT Trading

When engaging in BTST (Buy Today, Sell Tomorrow) trading, it's crucial to be aware of and manage the potential risks associated with overnight gaps in stock prices. Here are some cautionary messages to help traders navigate gaps in BTST trading:

Mind Overnight News:

• Caution: Overnight gaps can occur due to unexpected news or events that unfold when the market is closed. Stay informed about global and economic developments that might impact your stock.

Set Realistic Stop-Loss Orders:

• Caution: Price gaps can lead to significant market moves. Set stop-loss orders at realistic levels to limit potential losses in case the market gaps against your position overnight.

Understand Limitations of Stop-Loss:

• Caution: During periods of extreme volatility or news-driven events, stop-loss orders may not guarantee execution at the specified price. Gaps can result in slippage, leading to a different exit price than anticipated.

Avoid Illiquid Stocks:

• Caution: BTST trading in illiquid stocks can be riskier. Low liquidity may exacerbate price gaps, and executing trades at desired levels may be challenging.

Diversify and Hedge:

• Caution: Diversify your BTST portfolio and consider hedging strategies to spread risk. Relying on a single stock increases vulnerability to adverse gaps.

Check Corporate Events Calendar:

• Caution: Be aware of corporate events, earnings announcements, or other significant dates that might impact your stock. Price gaps often occur around such events.

Monitor Market Sentiment:

• Caution: Gaps can be influenced by overall market sentiment. Monitor market indices and investor sentiment indicators to gauge the broader market's potential impact on your BTST trades.

Avoid Large Positions:

• Caution: Consider limiting the size of your BTST positions. Large positions can magnify the impact of overnight gaps on your portfolio.

Review Overnight Trading Rules:

• Caution: Familiarize yourself with the rules and regulations of your trading platform and the exchange regarding overnight trading. Ensure compliance with margin requirements and other relevant guidelines.

Continuous Learning:

• Caution: Markets are dynamic, and conditions can change. Stay committed to continuous learning, adapt your strategy based on experience, and be prepared to reassess your approach.

Remember, while BTST trading can offer opportunities, it involves risks, and no strategy is foolproof.

Caution and diligence are essential to manage the challenges associated with overnight gaps and to navigate the complexities of the stock market.