Many people have taken to day trading as a full time job. They love stock markets and live and die along with it. Many international research reports suggest that day trading is a loss making proposition and most day traders end up eroding their wealth. This however does not really apply to Indian stock markets. In other words we are less perfect than other markets and the opportunities to profit from day trading are many. This does not mean that you will not take a loss. In fact, against 30 winning trades there will be 70 losing trades. The numbers are arbitrary but you will generally always have more loss making trades than profit making ones. The key is to not get affected when you lose, protect your money and make a bang when you come across a profitable opportunity.
The most important step in trading is to have a set of rules. These rules help you play in a more logical way and avoid getting swayed by emotions. For example, one rule to swear by is to apply a stop loss for every trade that you enter. No matter how confident you are about the profit opportunity, markets are unpredictable and you need to have the guard in place. It’s like you don’t want to be having unprotected sex. You need to have a loss bearing capacity but as soon as your stop loss hits, you want to be out of the position. Don’t get emotional. Follow the rules.
Another important thing is about when do you book profits. You enter a trade, the stock price starts rising. As the price rises the fear of it falling again hits you and you exit the position only to see that the price kept rising even after you are out of the trade. This is a missed opportunity and you don’t want to do that. You need to run your profitable trade to the maximum possible. How you do that will only come by experience. The more you trade (with your set of rules) the better and more comfortable you will get.
Another good technique is to trade with a small number of stocks at any given point of time. Don’t keep changing the stocks and focus on a small number. This way you will get familiar with how these stocks move, and you will start seeing patterns which will help you identify more profitable moves.
An important question people ask is – how to select a stock for trading? I’ll soon write another post where I’ll try and answer this question.
Until next time!