Trading is the new sexy, the newspapers are filled with news of markets making one high after another, markets are seeing record inflows and thousands are flocking to the markets to make a fortune for themselves. Day Trading is hip.
If you don’t believe the hype, have a look at the image below. I made over 100K in a day trading the markets. Read the article to know more about it.
The goal of a successful trader is to make the best trades. Money is secondary.
With markets scaling new highs every other day, there is a lot of hype and euphoria surrounding the markets. Day trading is the new buzzword and you find thousands of employees, businessman and students trying their luck at day trading in the hope of making a quick fortune. However most people fail to understand this The market wasn't designed so that most people could beat it Click To Tweet
This does not mean that you cannot make money in the markets. However if you are considering trading the markets to make some serious money, then I recommend that you read this article carefully in order to better prepare yourself for what lies ahead.
|Beginners guide to Stock Markets|
What is day trading?
Day Trading involves taking market positions for a day with the aim of making a profit.
A day trader typically looks to take advantage of the volatility in the markets and reduce any risks that arise as a result of holding positions overnight. A day trader will often trade multiple times during the day looking for small profits and eventually closing all positions by the end of trading day.
Day Trading got a bad name because of people who thought they could get rich overnight without any skill or effort. Yet it is the most lucrative source of income if you are prepared to learn simple rule based strategies and implementing them in your trades.
Do you have what it takes?Learn to take losses. Do not let your losses get out of hand. Click To Tweet
Day Trading is not some rags to riches scheme where everybody wins. In trading you need to be prepared to get your butt kicked. Here is a list of qualities that you might want as a trader
A trader must be flexible enough to change his trades based on the market conditions at hand. A good trader will always follow the trend rather than anticipate it.
Trade what you see, Not what you think
Nobody can teach you flexibility though, either you have it or you become flexible through experience.
Discipline is what differentiates traders from gamblers. A gambler will keep on gambling until he looses all that he has, but a trader knows which opportunities to chase and which ones to let go. Discipline will stop a trader from wasting capital on high risk low reward opportunities.
A trading plan can help introducing an element of control in the trades that a trader may take. There are thousands of opportunities in the market every day. A trading plan that is flexible enough will allow the trader to take the opportunities with the best profit potential whilst allowing him to keep an eye out for any unexpected opportunities that the market might throw up.
The Cost of Day Trading
Day trading is not as easy as it appears, neither is it so hard that you cannot master it. However to become a successful day trader, it may take from 6 months to a year depending upon your skill and dedication. The market is a dynamic beast, what works one month may not work the another. As a trader you will need to constantly adjust and adapt to the changing market conditions.
You need to spend time in the market to practice your strategies and fine tuning them. Practice helps build discipline and skill that will be very useful once you start trading big amounts of money.
Depending upon the markets and the instruments that you are trading, the capital requirements will differ. For example, you will need around Rs 75000 to trade one lot of Nifty50 futures or you will need around Rs 99000 to trade one lot of BankNifty futures
Instruments like options have limited risk but unlimited profit potential, whereas futures have unlimited risk and unlimited profit potential.
Hardware & Software Requirements
You will require a reliable computer or laptop with a stable and high speed internet connection. It is desirable to have a backup internet connection as you do not want to miss out on a lucrative opportunity just because the internet stopped working. A good cell phone will come in handy when everything else fails. You can use the cell phone to call your broker and manage orders offline.
Most brokers provide their own trading platform to get you started with trading. As a beginner this should be enough. However as you continue to grow as a trader, you may want to purchase third party software like Amibroker or Metatrader.
Brokerage & Commissions
Brokerage may not seem much at 0.05%, but it quickly adds up if you are taking multiple trades with heavy positions. I would recommend going for a discount broker like Zerodha who has a flat pricing of Rs 20 per trade for traders. Keeping your brokerage as low as possible is imperative to your trading success.
Day Trading Income Goals
When it comes to day trading the range of income is as wide as wide can get. Some make millions a year while others end up blowing their accounts. When deciding income goals from day trading, one should be realistic and not expect the market to oblige to personal wishes.
Ideally you should not risk more than 1 percent of your entire capital per trade. You should aim to make 15-20 % per month. This means that if you have 100,000 Rs in your account and risk 1% per trade and make 30 such trades in a month with a risk to reward ratio of 1:3 and have a success rate of 35% then you can expect to make Rs 14000 (14%) for that month.
10 Golden Rules for Day Trading
Outlined below are the 10 rules I follow to make money while trading.
#1 Plan To Trade And Trade To Plan
Only fools trade on emotions and gut. Successful traders trade according to a plan. It is always a good practice to set some time aside to plan trading activity for the next day. A plan should clearly detail the Entry price, Exit price and Escape price in case things start going down south.
Having stop losses set up in the system will help protect your trading account in case something goes wrong, similarly having clearly defined exits will help you lock in those profits that you have made. In trading entry is everything, a good entry point will give you a good risk reward ratio which is what will determine your long term success.
#2 Understand Supply And Demand
Markets are a function of supply and demand. If there is a huge demand for a particular stock or commodity, its price is bound to go up, no matter what. Similarly, if a stock or commodity is witnessing huge supply pressure, the prices can go only in one direction that is down.
Determining demand and supply dynamics is the first step in your trading decision.
#3 Practice Trading In A Demo Account
As a newbie trader you might find it useful to trade using a demo account, so as to not blow up your real money while practicing trading. A demo account is a good trading exercise before you go out there in the real world.
The more seriously you are going to trade in your demo account, the better are your chances of success in a real one.
#4 Keep A Journal
It is always a good habit to maintain a record of trades. This way you can keep a track of your winners and loosers. You can also keep specific notes that you can refer later. You can then analyse your trades and find out what works best for you and what to weed out from your trading.
Surprisingly analyzing your losses will help you grow more as a trader than analyzing your winners.
#5 Risk Only What You Can Afford To Loose
Many a times people in their greed or foolish enthusiasm put a lot more money in their trading account than they ought to have. Ideally you should trade only with as much amount of money which you do not need in the foreseeable future and can afford to loose.
If you don’t risk you can’t win, if you loose too much then you can’t risk.
There are no guarantees in the market and if you loose your emergency money in the markets, you will only have yourself to blame.
#6 Have Good Risk Reward Ratio
Even the most successful traders do not have a 100% win ratio. However what makes them successful is that the winners make up for more than their losses. A good risk reward ratio means that there is less pressure on you to win all the time as illustrated in the graphic below
As you can see from the graphic above, the better your risk reward ratio is, the less number of times you need to be right in order to make money. As you get better and better with your trading, you should aim for a risk reward ratio of 1:5.
#7 Cut Your Losses Early And Let Your Profits Run
I have seen so many people who do exactly the opposite of what this point says. They get excited by their winning trades and close them out early either in fear or greed, but when it comes to loosing trades, they hold on to them in the hope of a turnaround.
If you are to make money in the markets, you have to learn to take losses. Having a plan as discussed in point 1 will help you deal with losses. Remember to stick to your plan and do not give in to your emotions in order to stay on the right side of the trade.
#8 Do Not Trade In The First 15 Minutes
Amateurs open the market and the professionals close it
The first 15 minutes of the market should be for observation and not trading. This is the time to look for any possible reversals or simply judge the trend of the market for the day. The first 15 minutes are often panic or eager trades and should be avoided.
#9 Do Not Trade On Tips
Never act on hot tips floating around in the market. These often lead to a bad trade or a series of bad trades. When you act on a tip, you are not sure what to do in case something goes wrong, also by the time something goes wrong, the tipster is nowhere to be found.
Always better to trust your abilities than any tipster around.
#10 Avoid Leverage At All Costs
Most of the brokerage houses offer leverage to traders these days. Some even offer 40 times leverage, that means if you have 100 Rs in your trading account, you can buy or sell stocks worth 4000 Rs. Such leverage can increase your profits exponentially but it also can aggravate your losses. Rather than bad trades it is leverage that kills most traders.
If you can’t be profitable with 100 Rs then trading with 4000 Rs is going to make the situation even more worse
Note: Novice traders should learn to trade without leverage
Do not expect any quick results with trading and be prepared to tough it out for at least 6 months before start to make any real money. Trading requires capital, if you trade with too less, you will be forced to exit positions in case of unexpected volatility. Invest sufficient time and resources in the market to reap greater rewards at a later stage.
Have yourself a nice computer, fast internet connection and a good charting software. Get yourself a discount broker like Zerodha so that you don’t spend too much on brokerage. Focus on simple methods that work for you and don’t rely on tips.
Most important, do not play with leverage unless you fully understand the risks associates
That’s it from me folks, now it is your turn to Like, Share, Subscribe and Comment 🙂