Buy Today and Sell Tomorrow (BTST) Trading Strategy

Understanding BTST Trading

Before understanding how to use this strategy, it's helpful to know the BTST meaning. BTST stands for Buy Today, Sell Tomorrow. As the name suggests, you buy shares on one trading day and sell them on the next, without waiting for the shares to be credited to your demat account.

In normal delivery trading, shares are credited to your demat account on T+2 days. This means you cannot sell them immediately if prices rise the next day. BTST trading works as a workaround to this delay. If your broker allows BTST trades, you can sell the shares the very next day, even though delivery has not yet taken place.

How Does BTST Trading Work?

When you buy shares under BTST, the broker allows you to sell them the next day based on the expected delivery of shares from the exchange. The actual settlement still follows the normal cycle, but the broker manages the risk during this period.

It is important not to confuse BTST with intraday trading. Intraday involves buying and selling on the same day, while BTST involves buying today and selling the next trading day.

BTST trading sits between intraday trading and delivery trading. In intraday trading, all positions must be squared off on the same day. In delivery trading, you can sell shares only after they are credited to your demat account. BTST allows you to benefit from short-term price movements without waiting for full settlement.

BTST is useful when you expect a stock to move up overnight due to news, results, or overall market momentum.

BTST Profit Formula:

Profit or Loss = (Sell Price − Buy Price) × Number of Shares − Charges

Example of BTST trading

Let’s look at an example to understand BTST trading better.

1. Let's say a customer has ₹10,000 in their demat account.

2. Through their online trading account, they purchased five shares of HCL on Monday for ₹2000 each.

3. The same 5 HCL shares were sold for a price of ₹2100 per share on Tuesday.

On Monday, ₹10,000 gets automatically blocked in the demat account for the purchase of HCL shares (Buy Value = ₹10,000; Sell Value = ₹10,500). The settlement for this transaction takes place with the exchange on Tuesday (T+1 day).

The customer sells the shares scheduled for delivery on Wednesday or Tuesday. The delivery of HCL shares is anticipated on Tuesday. So, the customer is permitted to sell the shares. Once the stockbroker receives the shares on Tuesday, it adds them to the client's upcoming obligation to deliver the shares. The sale gets finalised on Wednesday.

Benefits of BTST Trading

The following are some of the key advantages of the buy today, sell tomorrow strategy.

1. It enables you to profit from the short-term volatility or rise/fall in stock prices.

2. Since shares do not get credited to your demat account, BTST trades are exempt from Demat Debit Transaction Fees. Traders therefore need not worry about hefty charges.

3. If you discover intraday trading to be unprofitable, BTST will offer your transactions an additional two days to perform better.

Disadvantages of BTST Trading

Here are a few downsides of BTST trading:

1. Unlike intraday trading, The majority of stock brokers do not provide margin to the BTST service with their trading account. The orders are cash & carry. Therefore, the individual must pay the entire cost of a trade.

2. Short delivery is another danger associated with BTST. Assume that you buy 200 shares of BTST today and sell them the next day. What if the trader who sold you the shares failed to deliver them? He will undoubtedly suffer from the transaction. The shares will be put up for auction by the exchange, and a penalty of up to 20% of the share price will be assessed. Your shares will be credited the next day, or T+3.

3. The price increase at the very end of a trading session may be the consequence of the market's automatic response and may not continue into the following session.

4. SEBI modified the BTST regulation in 2020. Before initiating a BTST deal, traders must pay a 40% margin.

Risks Involved in BTST Trading

While BTST trading has its advantages, it also comes with significant risks. One of the most prominent risks is price volatility. Stock prices can fluctuate drastically overnight due to various factors such as global market trends, company-specific news, or economic data releases. Since BTST trading requires you to hold the stock overnight, any adverse price movement could lead to substantial losses.

Another risk is the short delivery risk. Since you're selling the stock before the settlement cycle is complete, there is a possibility that the stock you bought might not be delivered to your demat account on time due to technical issues or other reasons. This scenario, known as short delivery, could result in penalties or even force you to buy back the stock at a higher price.

Liquidity risk is another consideration in BTST trading strategy. If a stock is not highly liquid, it could be difficult to sell it the next day at the desired price. This can lead to a situation where you are forced to sell at a loss.

Things To Keep In Mind For BTST Trading

1. Candlestick Chart Pattern Analysis

BTST trading depends heavily on short-term price movement. Before entering a trade, study candlestick charts to understand price behaviour. Patterns like breakouts, strong closing candles, or bullish reversal signals can indicate whether a stock may move up the next day. Avoid stocks showing indecision or weak price action near market close.

2. Put a Stop Loss to Minimise Risk

Always place a stop loss when doing BTST trades. Since you hold the position overnight, unexpected news or global market movements can push prices down sharply. A stop loss helps limit your losses if the trade moves against you. Never risk more than a small portion of your capital on a single BTST trade.

3. Invest in Liquid Stocks

Choose stocks that are actively traded and have high volumes. Liquid stocks are easier to buy and sell at expected prices. Illiquid stocks may have wide price gaps the next day, which increases risk and makes exit difficult in BTST trading.

4. Watch Out for Major Events

Overnight events can strongly impact stock prices. Company results, global market movements, economic data, or geopolitical news can cause sharp price gaps at the next market opening. Always check the event calendar and avoid BTST trades when major announcements are expected.

Misconceptions Surrounding BTST Trading

There are several misconceptions around BTST trading that can mislead novice traders. One common misconception is that BTST trading guarantees profits. While BTST trading offers the potential for quick profits, it is not without risk. The assumption that stock prices will always rise the next day is a dangerous fallacy that can result in significant losses.

Another misconception is that BTST in share market is suitable for everyone. In reality, BTST trading requires a sound understanding of market trends, technical analysis, and timing. It is not a strategy that should be adopted without proper knowledge and experience, as the risks can outweigh the rewards for unseasoned traders.

Many traders also believe that they can rely solely on BTST calls provided by various market experts. While a BTST call for today or tomorrow can be helpful, it should not be the sole basis for your trading decisions. Market conditions can change rapidly, and blindly following such calls without proper analysis can lead to losses.

Picking BTST Stocks

Good BTST stocks are those that are just about to make an upward breakout. For instance, the probability of a price breakthrough is indicated if XYZ's stocks were trading at ₹110 at 3 PM and then shot up to ₹115 at 3:15 PM. In this situation, traders may want to use the BTST trading method for the following day's trading session when the price rises.

Common BTST Trading Strategies

In addition to choosing the stocks for their BTST transaction, you as an investor should be familiar with technical trading and monitoring market news to predict price movements. The following are some good BTST trading strategies to implement.

1. Price Breakouts in Candlestick Charts

The 15-minute candlestick trading chart is a good resource for identifying BTST stocks. It displays the share's highs, lows, closing and opening prices. After 2 PM, when intraday traders start closing down their positions, the concluding leg of the trading session sees the highest price movement. Between 3:00 and 3:15 PM, if a stock price rises over the resistance level, it signals an upward trend for the next trading day. The equities may be kept for BTST trading.

2. Have a Stop Loss in Place

Although the BTST technique might provide appealing profits, traders like you should exercise caution when using it. It is recommended to have a stop loss in place. You should establish a limit at which you will sell the share in order to prevent further losses if the price of your stock drops the following day.

3. Investing Before a Major Event

One of the ideal times to apply the BTST approach is just before an anticipated occurrence that can generate stock market volatility. This can include events like company performance reports, RBI policy releases, election results, important corporate announcements, etc. In such instances, shares of firms surge in the near term. This makes it appropriate for the BTST trading strategy.

4. Trade in Selected Highly Liquid Stocks

The BTST technique requires meticulous stock price monitoring. In order to effectively follow stock prices, it is advised that traders restrict their trading to no more than two to three equities at once. Additionally, it is advised to choose highly liquid equities, such as large-cap companies, index-based stocks, etc., which are traded in significant quantities every day. This is because the trader must square off the position the next day.

5. Book Profits Upon Achieving Your Targets

Setting an entry price and a target level before trading is recommended. To protect your returns from sudden market reversals, you as a trader should book profits once you reach your target price and avoid letting emotions drive your decisions. Small profits are preferable to no profits. You should monitor the stock carefully and adjust the stop loss if you believe the share prices may increase further. Once you reach your desired profit zone, it's a good idea to utilise a trailing stop loss.

Mistakes to Avoid in BTST Trading

Even experienced traders can make mistakes in BTST trading if they are not careful. One common mistake is entering trades based on emotions rather than objective analysis. Emotional trading, whether driven by greed or fear, often leads to poor decisions. Always base your BTST call for tomorrow on data-driven insights rather than speculation.

Another mistake is ignoring BTST charges. Many traders overlook the impact of fees, taxes, and other costs on their overall profitability. Before entering any trade, calculate the total expenses to ensure that the potential profit justifies the risk and costs involved.

Failing to set stop loss orders is another mistake that can be costly. In BTST trading, where price movements can be sudden and unpredictable, stop loss orders act as a safety net, limiting your losses if the trade goes against you. Always have a stop loss in place to protect your capital.

Lastly, many traders make the mistake of holding onto a losing position in the hope that the price will recover. In BTST trading, time is of the essence, and holding onto a declining stock for too long can result in larger losses. It’s crucial to have a clear exit strategy and stick to it.

Conclusion

A key component of the BTST trading method is the idea of capitalising on overnight price changes of securities. It comes with risks and difficulties despite the possibility of quick profits and the way it uses the settlement cycle to the trader's benefit. Before engaging in BTST trading, you must carefully evaluate market volatility, liquidity, brokerage fees, and regulatory concerns. As with any trading strategy, BTST trading necessitates an in-depth knowledge of market dynamics, a systematic approach, and an acceptance of the dangers involved. Also, you will need an online trading account. Before starting BTST trading, you should evaluate your risk tolerance, create a solid trading plan, and keep up with market developments.