How to make money by day trading
Sanjay Matai, Moneycontrol.com
(Source : http://www.rediff.com/money/2006/aug/08perfin.htm)
Food is tasteless without spices. While one may manage a few meals without them, it is difficult to continue doing it day after day.
Something similar applies to our investing too. If we invest for long-term whether in debt or equity; if we have to keep patience and see our investments grow with time; if we don't do something actively; we tend to get bored. In fact we may even end up doing something foolish, if the wait becomes frustrating.
So we need to add a bit of spice to keep our interest going in building a long-term portfolio and wealth. Therefore, for that enjoyment and kick, one can look to doing some day trading.
But remember - just a little bit. Too much of spice makes the food unpalatable. Moreover, you cannot survive only on spices. But before, we jump into day trading here are a few guidelines, which may prove useful.
Allocate not more than 3-5% of your corpus:
Make sure that you do not allocate more than 3-5 per cent of your equity corpus for day trading. This is a high risk strategy and so even if one were to lose all money it will not hurt the overall financial situation. Yes the loss will pinch for some time, but you will get over the pain shortly. Moreover, it will enable you to come back and try again.
It doesn't become any easy with all the technological support:
People are attracted to day trading by watching the stock market tickers 24 hours on news channels. Fundamental information/technical charts are available on a number of websites and most of all there is the ease of online trading.
But these are mere technological tools which only facilitate easier availability of data and execution of trades. We have to learn to interpret that data correctly and convert it into meaningful information. Easy availability of data does not make everyone a genius. And those tickers can be very tempting like chocolates. Have self-control to a them.
Educate yourself:
It is a must that you understand all lingo of day trading, futures, call option, put option, delta, stop loss trigger among others. You need to be familiar with all such terms as you will come across these in your day trading. This will help to understand what experts are saying.
You must also be aware of the economic situation to take a proper view on the market and stocks. How will oil prices impact the market? What effect interest rates will have on the stocks you want to trade in? For example, rise in interest rates may have negative impact on capital intensive companies, which depend on a lot of debt. But may be good for cash-surplus IT companies.
Choose large cap stocks which have high trading volumes. You don't want to get stuck with an illiquid stock. Moreover, such stocks will have good amount of technical information. Try to predict the general direction instead of trying to hit tops and bottoms. Keep a track of all your trades and analyse them. Over a period time you will be able to pick up useful trends.
Learn to book your losses and gains:
The main reason why people lose money in day trading is because they are averse to making losses. If you have taken a wrong call or the market is not going as per your expectation, be very sure to book losses. Do not live on the hope that the market will turn around.
In fact, even before you make an investment, first decide at what loss you will exit. Stop loss pricing is the key to becoming a successful day trader. Always focus on limiting your losses, not maximizing your profits. Never add to a losing position. It is a prescription for disaster.
Similarly, don't be greedy. Book profits at regular intervals. A number of small gains is a more realistic strategy than going in for one to two big kills. Markets, in the short-term, are never logical, so don't try to assume anything. Flow with the market. Stick to the objective rules of profit/loss booking.
Discipline and emotional balance is critical to success. Profits should not make you over-confident nor should the losses intimidate you. No two people with same set of stocks and information will make same amount of money. It is their mental framework, which determines success or failure.
Do not overtrade:
One of the common mistakes people make in futures and options is overtrading because these markets work on margins, rather than paying the full trade value. Therefore, don't be lulled into complacency by the low margins. Make sure that your total trade value is within your financial means.
Also, day trading doesn't mean you have to trade every day. Even two to three trades in a month may be more than sufficient. Trading opportunities don't happen everyday, so bide your time. Even if you miss some of them, don't rue. Markets are not going anywhere. You will get your chance sooner or later.
Further, concentrate on just two or three scrips at the most to make trading more manageable. Moreover, over time you will get a feel of these scrips, which will help you to trade better.
A word of caution:
Day trading can be injurious to your financial health. Therefore, it is strongly recommended that you keep away from it. But if you find it irresistible, follow the above rules to minimize any damage.
The author is an investment advisor. He can be reached at sanjay.matai@moneycontrol.com
