Buy Today and Sell Tomorrow (BTST) Trading Strategy

What is BTST Trading?

BTST (Buy Today Sell Tomorrow) trading is Short-term trading where traders take advantage of short-term fluctuations in share prices. Unlike intraday trade, where shares are bought and sold the same day, shares in BTST are sold either- in cash or futures and options category and are sold the next day.

Under BTST trading, shares are sold before they get credited to the trader's Demat account. Like all kinds of trading, BTST trades have their share of risks and rewards. Let us look into some of the strategies that can be adopted to make the most out of BTST trades:

1. Put a Stop Loss for Risk Minimization

Although a BTST trading strategy can bring in substantial profits, the stock market is subject to immense volatility, and stock prices can soar or dip in mere seconds. The stop loss feature allows traders to minimize risks by placing a cap to restrict losses.

A stop loss can be put before the execution of the trade, and a trader will not be bound to book losses beyond this price if the share prices dip. Placing a cap on the upside protects traders from losing profits if the prices show a reverse trend. Therefore, the stop loss feature allows you to exercise caution.

2. Keep Abreast of Current Affairs

The stock market is affected by factors such as political upheaval, the financial performance of companies, mergers and acquisitions, natural calamities and RBI announcements, among others.

Such factors bring about short-term earning opportunities by triggering market volatility. Therefore, planning and executing a BTST strategy before a major event can increase your yields.      

3. Candle-Stick Chart Analysis

Traders use candlestick charts to make sense of regular patterns that forecast short-term price fluctuations in stock prices. These charts indicate four price points- opening, closing, high, and low. The patterns can be either bearish, representing an upward trend or bullish- representing a downward trend.

Note that these patterns of price movements are not guarantees but tendencies. Carrying out a candle-tick chart analysis of the stocks bought for BTST purposes, especially towards the end of the closing market hours, typically around 3 PM- 3:30 PM is the time when you choose either of the two options:

• Case I: Upward trend (price above resistance level): Hold the stock for the next session.
• Case II: Downward trend (price level below the support level): Settle for an intraday trade.

4. Go for Liquid Stocks

To implement this strategy, it is important to understand what is meant by a liquid stock. A liquid stock can easily be bought and sold in the stock market without impacting its price.

Thus, stock liquidity is an important indicator of how easily tradable a stock is. To identify whether a stock is liquid or illiquid, you must look into the following:

• The difference between the bid price and ask price: It is narrow for a liquid stock.
• The volume of trade: The trade volume is high for a liquid stock.
• Trade volume during high float (when a high number of shares are available for trading): For a liquid stock, the trade volume is high during a high float.

Opting for liquid stocks is an absolute must for short-term trading like BTST. You would want to find enough buyers to prevent yourself from getting stuck. Most large-cap stocks and index-based stocks are liquid.

Process Breakdown

The settlement cycle for an equity delivery order was T+2 days (where T stands for the day shares were traded). However, post the SEBI announcement in 2021, stocks have been moved to the T+1 settlement from 25 February 2022.

The BTST trading formula:

To demonstrate how BTST trading works, let us consider an example.

Suppose T is a Monday. This is the day on which you buy 10 shares of X Ltd at INR 1000 per share (your total investment being INR 10,000)

Assuming that the T+2 settlement is followed, the shares will be delivered to your Demat account on Wednesday. However, you have the liberty to sell the shares before they are even credited to your Demat account.

You now sell the 10 shares at a premium of INR 200 per share, your selling price being INR 1200.

Total Buy value of shares= INR 10,000

Total sell value of shares= INR 12,000

Wednesday (T+2) is the day your exchange is settled, and INR 10,000 is blocked following your purchase of 10 shares of X Ltd on Monday. You are to deliver the shares sold on Thursday (T+2) since you sold them on Tuesday. The credit from the sale of the fund to your account will be available on Friday because of the two-day waiting period.

Here, 80% of the sale proceeds can be utilized to purchase new stocks on the day of the sale itself (Tuesday, in the above case). However, the balance of 20% is made available to purchase new stocks on Thursday (T+1).

The Endnote

Despite the rewards of BTST trading, there is a flip side too. There is no best strategy for BTST trading since they do not guarantee profits. In an uncertain and dynamic world, the stock market can be subject to unfathomable fluctuations, which can be highly risky.

Post SEBI Regulations of 2020, 40% of funds are blocked as margin money in BTST trades. You might also incur a penalty due to the short-delivery of shares. Therefore, prompt and informed decisions in stock trading are of utmost importance, no matter the strategy.

Buy Today and Sell Tomorrow (BTST) Trading Strategy

FAQs

How does SEBI's new margin rule affect BTST trades?

SEBI's new trading margin rules made effective from September 1, 2022, necessitating a minimum of 40% (20% for buying and 20% for selling) upfront margin for BTST trades.

Failure to adhere to the margin rules will attract penalties according to the rates prescribed by the exchange from time to time.

What is meant by the auction penalty in BTST?

An auction penalty is a sum the defaulter has to pay for the non-delivery of shares after selling them. The exchange conducts an auction and buys the shares in the auction market.

The BTST penalty charges range from 0.5% to 1% and can go up to 20% of the short-delivered stock.

Please note: Due to payout shortages, we might temporarily restrict the Buy Today Sell Tomorrow (BTST) facility for specific stocks.

How is BTST different from STBT?

The first difference between BTST and STBT is that BTST stands for Buy Today, Sell Tomorrow, whereas STBT is the abbreviation for Sell Today, Buy Tomorrow.

Under BTST, stocks are purchased in cash or in the F&O segment. For STBT, one cannot take a position in the cash segment.

While BTST trades are allowed by almost all traders in India, STBT is not permitted.

What is better-BTST or Intraday?

Understanding whether BTST trading is better than intraday depends on the investor's risk appetite. One on hand, BTST allows you to take advantage of short-term price fluctuations. On the other hand, the risks associated with a drop in future stock prices after market closing hours are also possible.

The latest SEBI regulations require investors to meet a 40% margin against BTST trades. The blocked funds might make you lose out on a lucrative trading opportunity.

Which stocks to choose for BTST trades?

Look for the following when selecting stocks for BTST trades-

• Stocks whose prices move above the resistance level on the candlestick chart in the last leg of a trading session
• Large-cap or moderate to highly liquid stocks
• Don't base trading decisions on irrational market exuberance