To earn money in a fiercely competitive world is a difficult task. This isn’t a revelatory statement. In the past decade three things have transpired. Firstly, the rise of social media platforms ensures that people access a considerable amount of information. Secondly, the unprecedented improvement in technology has smoothened and reduced the time taken for basic as well as essential transactions. And, thirdly, the rising literacy rate in India. These three things have brought a revolutionary change in India’s financial markets. Today, the idea of making money through investing in stock markets is not an indulgence of the rich and the elites. Today, making money in the stock market is a dream for many.
In this context, many people do intraday trading, which is good to make money over a period of time. But can you do it consistently? Many traders want to make money consistently trading intraday. Though it is a tough job, it is not an impossible one. Key things include learning from experience and implementing the basics, practically. Here is what you should know before getting into intraday trading:
Strategy defines outcomes
In intraday trading, you have to make money in a short period of time. Hence, it becomes important that you define a strategy before you initiate a trade. The strategy should clearly define entry and exit conditions and stop loss. Your priority should be about preserving the capital. Be clear about how much money you can lose per trade. This will help you define the value of your position. You can also backtest your strategy. It will further boost your confidence to employ it. Once you get the strategy right, stick to it.
Stop-loss is the king
Do not let your emotions take over your trading. If you trade without stop loss, there is a fair chance that emotions will take over. When you initiate a trade, you must place a stop-loss order in the system. Sometimes the heart takes over your head, and the stop-loss is not adhered to. This can cost you dearly as stop loss protects you from huge losses and preserves your capital.
Start small
You may want to do paper trading initially. There are many simulation trading games available where you can trade using virtual money. It helps a lot.
Liquidity matters
Trade in liquid counters. Whether you trade in the cash market or in derivatives, you can only find an exit from an intraday trade if you stick to counters which have liquidity. Even if you trade a few lots in derivatives or a few hundred shares, do not consider trading in illiquid counters. You may get trapped in illiquid counters, and such a position carried overnight can be an invitation to risk.
Know the news
When you have a strategy in place, there are little chances of you facing huge losses. Such a strategy works for a longer period. There are days when a stock you are trading may not play out the way you wanted. Sometimes, events surrounding the company can cause bigger moves in the opposite direction than you had anticipated. Events such as quarterly results, annual general meetings, sales data announcements, or regulatory review events impact the movement of a stock. For example, the impact of changes in the monetary policy of the Reserve Bank of India (RBI) on banking stocks. Hence, it is important to figure out the reasons for any excess volatility in a stock. If you spot an unfavourable event, exit your trade.
Volatility, the second nature of market
Markets are volatile in nature which enables a trader to make money. It would help if you use volatility to your advantage. It pays you if you are on the right and wrong sides; stop loss protects you. But there are days when you should stay away. When you expect volatility to exceed the ‘normal’ range, then you should not be trading. At least avoid trading on an intraday basis. For example, on the budget day many intraday traders prefer to sit out. You may lose out on some opportunities but it also saves you from extreme losses.
Bearing the brunt
Trading is akin to a battlefield. Stop-loss works as a shield. As long as you stick to your strategy and your losses do not go beyond what you estimated, you still remain in the game. Losses are bound to happen. You must handle your emotions well. This will decide your success.
Record and analyse
You should strictly maintain your tradelog . It could be a simple spreadsheet. But every trade must be recorded in detail as far as possible. It helps you analyse your winners and losers, what worked in your favor and what didn’t. . You can make better strategies after analysing your previous trades.
Review your strategy
Participants change their behaviour towards trading in accordance with movements in markets. However, this is not the right strategy. Sometimes, your own strategy may not work, and sometimes, your trade book hints at it. If you have been carefully analysing your trade book, then you can improve your trading strategy.
Diversify
You cannot rely on one strategy while trading intraday. figure out multiple ways to trade. If you diversify across strategies offering varying risk-reward ratios, your overall portfolio will be better.. Identify multiple opportunities to deploy the same strategy. Either you can deploy the same strategy on multiple stocks, or you can deploy the same strategy at various moments of time during the day. This diversification helps bring down the timing risk. If a particular trade does not work out, then some other trade would work out for you.
Avoid overtrading
In trading, there are phases wherein a trader either makes good money or loses too much. These extremes make many traders lose their balance. Though too many wins do not hurt financially, they may bring in the sense of superiority and in some cases traders lose their discipline. In case of too many losses in a row, traders want to desperately make up for those losses by trading too much. In both the cases, outcomes may not be favourable. Overtrading not only inflates transaction costs but also leads to losses. If you cannot handle trades, take a break. It helps to refocus and helps in making a stronger comeback.
Check your costs
An intraday trader does not provide the luxury of multifold returns. If you are trading for a percentage point or two, you have to be mindful of the costs. It may not hurt on the winning trades but it will definitely hurt a lot when the stop loss gets triggered. Keep a tab on the brokerage you pay and also keep an eye on statutory levies. Any changes on these fronts can eat into your trading profit materially.
Adhere to rules
Regulators and stock exchanges come out of many guidelines from time to time. The idea is to make the regulatory framework robust. However, at times these changes make few strategies unviable. Sometimes brokers are told to withdraw few products or order placement mechanisms, for the greater good. If you have been using such strategies then such strategies become irrelevant.. If you have been running multiple strategies, then it helps in such situations. So, it is important that you are aware that your trade complies with the regulations or laws.
Use technology in the right way
Intraday trading is all about swift decision making. You have to decide and execute. Very few intraday strategies can allow you to sit back and relax. A robust tech-enabled trading interface is a must for intraday traders. Avoid getting into ‘call and trade’ arrangements. Be hands-on with order placing and use all facilities provided by new-age stock brokers.
All in all, intraday trading is rewarding for those who have realistic expectations from the market.