By Vishweshwar HS, www.showmytrade.com
Day trading or intraday trading is buying and selling a financial instrument (Equities, ETFs, Futures, and Options) the same day or multiple times of buying and selling (trading) within a day.
Day trading aims to make a profit from the small price movement of stocks. Day trading can be lucrative to make money from the stock market and create a study income.
However, it is dangerous for newbies and beginners in the stock market. To be a successful trader, one needs to learn day trading strategy, practice handling various challenges of the volatile market, and improve the knowledge, methods, and trading tools.
Related Article: What is Intraday or Day Trading?
The experienced traders, with excellent knowledge of day trading, trading experience, and highly developed strategy of entry, exit, profit target, and accepted stop-loss. Professional day trader’s motto is earning “minimum and consistently.” However, newbies go with “high risk and high profit,” losing considerable investing capital. Thus, day trading can provide a steady income for experienced traders.
The Stock Brokers/Exchange provides the margin trading facility. Margin trading means you can take leverage positions in the stock market. For example, If you have Rs 10,000 in your trading account, you can trade long (buy first) or short (sell first) 5X-10X more, i.e., Rs 50,000 – Rs 1,00,000 worth of shares.
These margin positions increase your profit (if you’re right) or make a considerable loss (if you’re wrong) to your capital.
In day trading, one can make money if the market is going up called long (buy at a lower price and sell at a higher price). If the market is going down, it is called short (sell at a higher price and buy at a lower price), even if you don’t have the stock. In day trading, we can go short of equities. But have to close your short position on the same day. Thus, day traders can capture both going up and down stocks (Uni-directional).
Day trading is learnable art. It takes a lot of practice and stock market knowledge, and several factors can make the process challenging.
Retail traders are going up against well-trained professionals who are living out of trading. The big stock market players like Institutional traders, High Net worth Individuals, Broking firms have access to the best technology and actionable trading news. Untrained retail traders are contributing more money to such big players.
Every trade you make, you have incurred costs like brokerages, service tax, S.T.T., Turnover tax, etc. The newbies excited about trading tends to trade more and more without any trading plan!
Apart from fixed expenses, the sudden market movement makes it difficult to buy and sell exactly the price you wanted to execute. This slight difference between your actual buying price and your intended to buy is called slippages.
A tax is part and parcel of any business activity. Government charges taxes on profits made by investment/trade. However, you can set off any loss from trade against gain from the trade.
The most significant factor that influences the winning and losing trade is the emotional and psychological biases of the individual trader. Professional traders are trained to avoid, hedge, and have well-defined strategies to overcome emotional biases. But, it is challenging for individual traders as their money is involved in trading.
Developing good trading habits goes in a long way. Some productive Day Trading Tips that help in making good profits, and limiting the losses are:
Day Traders need to know the trading procedure, rules, and quick techniques that affect the market. Also, day traders need to keep up on the latest breaking stock market news and events calendar. The company’s result announcement, Central bank R.B.I.’s monetary policy, interest rate news, the publication of G.D.P. numbers, Inflation, etc. news that affects stocks.
Day traders need to make home works about the news announcement and its effect on a stock or the whole market. However, day traders can make good use of websites and scanners available in the market.
The important part of day trading is the allocation of funds, defining and managing what maximum loss can take per trade. Many professional, successful traders limit their loss to 1-2% of their capital. For example, you have Rs 1,00,000/- trading capital and 2% of the risk you can take. Then Rs 1,00,000 x 2% = Rs 2,000/- is the maximum risk you can take.
Here, it is crucial to prepare to lose the trade also. Remember, the stock market works on probabilities!
Day trading, like any other professional, needs time to participate in successful trades actively. In day trading, you are scanning and identifying the small high probability moves with high quantities to gain small but real meaningful gains for the day. If one does not have time for day trading, it is not a good idea to be a day trader. The opportunities can come at any time during the trading sessions. Moving quickly and executing such occasions is the key to success.
As a newbie day trader, it is not possible to track multiple stocks. As new traders emotions and excitement of stock movement either up or down are too taxing. The high expectations of newbies are met with hard reality, and disappointments are challenging to handle.
It is advisable to trade in a small quantity in one or two trades per day. Like the day traders experience increase, sizable money can deploy for trading. “trading experience” is a critical factor in deciding whether day trading is for you or not!
For new day traders, it is common to think; let’s buy penny stocks at a very low price, say Rs 1, Rs 2, or 3, and sell the shares when their price moves to Rs 10, 20, or Rs 30. In practice, only a few stocks can give a very handsome return. But, the majority of the shares will lose your substantial or all the invested capital. In day trading too, new traders try this concept and lose significant money.
Another popular method the new traders adopt is trading based on Tip providers. In the long run, traders lose money either by not following the stop-loss order or wrong call. It is highly recommended to learn the stock market yourself and practice for long-run trading success!
As newbie traders usually enter the trade as soon as the market opens. The untrained retail traders participate in the opening session based on what news/views they have heard overnight! Morning, opening session for first 15 mins -30 mins is very volatile (moves very fast between high-low in short-time). The Professional traders wait and watch the market/stocks movement, identifying the stocks which give them a trading edge & excellent risk-to-reward trade before executing the trade.
However, high volatility is the best friend of professional day traders if you trade according to your trading plan!
Stop-loss orders are placed by traders to limit risk or to lock some profits and take a chance on a big move. The trader can set and modify a stop-loss order in the trading platform. A stop-loss order effectively places a market order once a price threshold is triggered.
To be a money-making day trader, learning different types of orders, and learning the stop-orders is essential. Identifying the risk and reward for trade can be successfully executed with the help of Stop-loss orders.
Related Article: What is a Stop-Loss Order?
New day trader hoping to get rick quicker. However, this is not sustainable as a professional trader expecting to win 60% of trades, and risk is also involved in it. Professional traders win big in their winning trade and lose small in the losing trade. A professional trader usually comes with a minimum but consistent profit policy. It is highly recommended that a newbie trader keep your expectations less, as your risk also increased with higher expectations!
The biggest challenge for newbie traders is staying calm at times; the volatility and sudden movement in the stock markets test day traders’ nerves. Being a day trader needs to learn to keep greed, hope, and fear at bay (easy to say but hard to practice) —trading decisions must be governed by logic and not emotion.
There is an excellent saying in the market “Plan your trade and trade your plan.” Professional traders designed their trading plan in advance and also set their stop-loss and target price.
Professional traders wait till they get the opportunities according to the trading plan and execute it quickly. They will not let their emotions get in their way!
Day trading can provide a constant source of income if traders take it seriously and do their research. It is a high-risk and reward game. But one needs to learn a good trading plan, have the patience to get an excellent opportunity, and yet work with the amount of risk to take for each trade. To be a successful trader, one needs more time, understanding, and the ability to handle uncertainty. In the extended run, day trading can be an excellent source of earning!
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Thanks for reading.