“The principles of successful speculation are based on the supposition that people will continue in the future to make the mistakes that they made in the past.” ~ Thomas F. Woodlock
Intraday Trading, also known as Day Trading, is the trading system where you take a position in the market and close that position before the end of that day’s trading session. Thereby making a profit or booking loss for you in that buy-sell or sell-buy exercise. Although it may appear to be the easiest way for a living but it is not so, rather it is one of the most challenging venture to be in. The reality is, day trading is for the minority – not the majority. Recent statistics suggest that just under 97% of all beginner traders fail, so the odds are not in your favour to begin with. Nevertheless, you may also be aware that day trading can indeed be very remunerative – providing you develop the right skills you can become very profitable very rapidly and enjoy a complete independence too. Sounds interesting? Let us just take a ride into in to the world of the intraday trading.
Commonly used Intraday Trading Strategies
Scalping It is one of the most popular strategies, which involves selling almost immediately after a trade becomes profitable. Here the price target is obviously just after profitability is attained.
Fading It involves shorting stocks after rapid moves upwards. This is based on the assumption that (1) they are overbought, (2) early buyers are ready to begin taking profits and (3) existing buyers may be scared out. Although risky, this strategy can be extremely rewarding. Here the price target is when buyers begin stepping in again.
Daily Pivots This strategy involves profiting from a stock’s daily volatility. This is done by attempting to buy at the low of the day (LOD) and sell at the high of the day (HOD). Here the price target is simply at the next sign of a reversal, using the same patterns as above.
Momentum This strategy usually involves trading on news releases or finding strong trending moves supported by high volume. One type of momentum trader will buy on news releases and ride a trend until it exhibits signs of reversal. The other type will fade the price surge. Here the price target is when volume begins to decrease and bearish candles start appearing.
Types of momentum Day Trading: Day trading mechanism devised into two categories.
Stop loss trading mechanism: In this principle trader initiate position with some stop loss in mind if the trade goes against the trader then trader exit the position with some acceptable loss.
Swing Trading Mechanism : In this principle trader initiate positions keeping in mind that if the trade goes against the view then trader will initiate an opposite leg trade upon achieving the stop loss. Say you have bought BARCLAYS at 190 with stop loss 188. As a swing trader your view will be if BARCLAYS will fall to 188 you will close your existing long position and re-enter fresh short position in same counter.
Rules for winning in the game
Like any stock trader, to make money through intraday trading at the stock market you must have a trading plan, set limits and stick to them. You must trade based on the data on the screen — not based on emotions like hope, fear, doubt and greed.
To put that plan in action you need do some preparation and define an objective. That’s a basic strategy for any endeavour, whether it’s running a marathon, changing your car, or taking up day trading. Day traders have to move quickly, so they also have to take decisions quickly. You must also have patience. Some days there is nothing good to buy. Other days it seems like every trade can bring you money. But everything just turns around as soon as you really put in some money. Be patient, and take a calculated decision.
Good day trading practices help limit the effects of a bad day: Two inevitable things to do are
The first is the use of stop and limit orders, which automatically close out losing positions as per your calculated risk. In this way even if one is able to get the correct trade 50-60 % of the times , he will stay profitable because the risk – reward ratio lets you get out of the losing trade in time before any serious damage is done and whereas the right trade lets you ride the profits up to the target set.
“This is not a perfect game. I compile statistics on my traders. My best trader makes money only 63% of the time. Most traders make money only in the 50 to 55 percent range. That means you’re going to be wrong a lot. If that’s the case, you better make sure your losses are as small as they can be, and that your winners are bigger”- Steve Cohen says in his interview to Jack Schwager’s Market Wizards-
The second is closing out all positions at the end of every day, which lets traders start fresh the next day. Because they close out their positions in the stocks they own at the end of the day, whether winning or losing, some of the risks are limited. There is no hangover. Each day is a new day, and nothing can happen overnight to disturb profit that you have realized on the previous day.
When beginning intraday trading, you will come across two styles of trading – fundamental and technical. As a day trader, technical analysis is likely to be your best friend. Technical analysis entails looking at historic price data to derive future price movements. Equally as pivotal as technical analysis is money management. Obviously a trader will enter the financial markets in order to make a good profit, so a good cash management scheme processed for intraday trading is clearly necessary.
To put it in the words Dr. Alexander Elder (Excerpts taken from his book-Come into my Trading Room)-
“Successful trading depends on the 3 M’s – Mind, Method, and Money. Beginners focus on analysis, but professionals operate in a three-dimensional space. Money refers to how you manage your trading capital. Mind, Method, Money – trading psychology, trading method, and money management – people sometimes ask me which of the three is more important. It is like asking which leg of a three-legged stool is most important. Take away one of them and try to sit down. “
Day Trading as a hobby?
Day Trading as a hobby is a bad idea, because the fact is hobby costs you. Professional traders are betting that there will be plenty of amateurs out there which are going to trade for fun or the irresistible urge, without doing proper homework.
Day Trading part-time?
Can you make money day trading part-time? Yes, you can, and some people do. To do this, they approach trading as a part-time job, not as a little game to play when they have nothing else to do. A part-time trader may commit to trading few days a week, or to closing out early instead of at the close of the market. A successful part-time trader still has a trading plan, still sets limits & stops, and still acts like any professional trader would, just for a reduced part of the day.
Suits your personality?
Just like everyone is suited well in different professions in life, one person can be good at one particular sport while very poor in other, it is the same way in day trading. It is not necessary that a person who is a good investor will also be good in day trading or a person doing poorly in long term investing has a mindset of a great intraday trader. It is the person himself who has to decide whether his personality, daily routine, decision making suits for intraday trading, it is only after that one should attempt the venture. If your heart starts to pound as soon as one tick moves against you and on the other hand you cannot hold the excitement on the favourable trade, the its better you should think about long term investment rather than trading intraday.
Keeping a Track Record
One thing seen common while trading intraday is the tendency of getting in and out of the trade just on the slightest tick moves, screwing up the entire trading plan. This habit not only leaves the trader in dismay but also indulges in too many futile trades. One small habit of keeping a track record of the trades will not only keep a check on the trades but also help to judge the performance. It is human nature to run away from the thing which one does not like, so at times when there are exceptional good and bad days, this habit is often compromised and neglected, which leads to errors in trading sooner rather than later. If you are serious to make intraday trading as a profession then you just cannot afford to keep the strings lose, after all it is all about discipline and discipline.
Hope by now you have got the idea that intraday trading is not an easy nut to crack, as often misunderstood by the masses but is rather one of the toughest professions to be in but if you aspire complete financial independence, adventure and endless rewards for right decisions then these are relatively small costs to incur.
While trading we create several mistakes, particularly the new traders. There may be numerous reason for this, like some aren’t qualified or poorly trained, several don’t have the traits to trade. This market needs elite performers. You would possibly work less at your company, but get incentive for whatever you have done, and even get promoted for an equivalent, but here an equivalent strategy cannot be applied. The market can swallow you like a shark and cannot let you return up if you’re not sharp. Be prepared to struggle and work vigorously to sustain and learn each and every concept.
A deliberate practice is what you need to become nice at something. You must follow practice hundreds of times to develop the talent to play within the market and trade in real time. To become an intraday trader, just learning the charts is not enough. It’s about targeting the goal, making of the strategies, money management, risk control, contingency plan. Trading is just a performance-based business. Here, you cannot blame anybody except you. It will be your fault for missing that trade. Here, everyday could be a new day; everybody is bright, talented, ambitious, well educated and got some edge. Your mindset, strategy, and knowledge are counted than anything else.
As Larry Hite mentions in Jack Schwager’s Market Wizards-
“I have two basic rules about winning in trading as well as in life: (1) if you don’t bet, you can’t win. (2) If you lose all your chips, you can’t bet.”
The Bottom Line
Day trading is a difficult skill to master. As a result, many of those who try it fail. But the techniques described above can help you create a profitable strategy and, with enough practice and consistent performance evaluation, you can greatly improve your chances of beating the odds. The profession of trading is all yours if you’re passionate, posses the ability to survive within the learning curve of the market. The market does not care whether or not you’ve got a family or you are successful trader while executing trade. All that matters here is the best of your trading skills.
“A loss never bothers me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocketbook and the soul.” ~ Jessie Livermore in Edwin Lefevre’s Reminiscences of a Stock Operator
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