CashCow Chapter 3.3 – Day Trading

Trading is a good option to generate returns from stocks and other instruments in a shorter time frame as compared to value investing that works over a longer time period.

If you take up intraday trading, you will need to commit some time to trade actively because it cannot be done passively. With trading, you can create an additional income stream.

You can day trade in various instruments like stocks, equity derivatives, commodities, and currencies, which we will discuss a bit later.

Before that, you need to learn the basics of trading and devote time to trade daily because unlike investing, trading needs dedicated time to prepare, execute strategy, and monitor positions.

There are ample trading opportunities to earn every day.

You should target 1 or 2 profitable trades daily keeping in mind that the primary goal is to preserve capital.

If you are able to make 2% returns daily, then it is possible that you will earn a 44% return monthly.

But this is not easy as all your trades will not be profitable and your losing trades may wipe out your profits if you do not follow risk management rules of trading.

You need to save yourself from losses and for that, your goals while day trading should be as under:

#1. Capital Preservation

You need to trade prudently with the ultimate aim of preserving your base capital and profits. 

This can be done by placing stop loss while trading so that you do not run the risk of large losses. But cut the position when the market moves against your trade.

#2. Winning for more days, losing for less

It is impossible to close all the intraday positions in profits, even professional traders find it hard to do that.

Instead, you should try to have more number of profit days than loss days. If 70% of your trades are in profits then definitely you will end the day in profits.

#3. Control greed, avoid fear

Intraday trading is good when you have a plan and trade mechanically as much as possible. 

Emotions like greed and fear divert you from your trading plan and make you execute unnecessary trades which can lead to losses.

#4. Go for small wins in the beginning

Intraday trading is all about capturing small price movements for a number of times rather than waiting for a big single move which may or may not happen. 

Small wins will also give you the confidence to trade.

#5. Avoid days where chances are higher for losing

On days where a company is declaring its results or making some corporate announcements, its stock can be volatile. Global, political and other economic news too impact markets.

On such days there are possibilities of huge price swings and the market can have large fluctuations. The chances of losing are higher if you trade on such days. It is always better to avoid trading on such days.

#7. Use 10% of capital for a single trade

Trading involves the real-time risk of losing all your capital. You need to allocate only 10% of your capital for a single trade instead of using 100% of the capital in one trade.

Trading this way will limit your maximum loss to 10% of your capital and also give you a chance to trade the next time.

Now that you have the trading guidelines, let us explore the different types of trading options available.

Types of Trading

#1. Intraday Stock Trading

Intraday trading in stock involves buying/selling stocks without owning the stock.

You can sell first if you have a view that the price will go down and then buy later, also known as going short. For example, you can sell CEAT shares at Rs. 900 and then buy it later at Rs. 890 and close the trade with Rs. 10 profit.

Or you can buy now if you view that the price will move up and then sell later at a higher price, also known as going long.

According to your view, you can buy the TCS shares at Rs. 2280 and then sell it when the price reaches 2300 and earn a per-share profit of Rs. 20.

For intraday trading, you can use the leverage provided by your stockbroker to take a large trading position on a small amount of money.

For example, if you have a 5X leverage available then with Rs. 20,000 you can take a position of 20,000 x 5 = Rs. 1,00,000.

All you need is to have an understanding of the charts and a view of the stock price movements.

For intraday trading, you can start with an initial capital of Rs. 10,000 but then you will be able to take small positions and will need to execute more trades to generate meaningful returns. 

Allocating higher capital in the range of Rs. 25,000 to Rs. 50,000 can help you take optimal positions.

You can take the help of the charting tool provided by your stockbroker. Or you can even use tools like Streak for creating trades, testing and then executing.

#2. Equity Futures & Options Trading (F&O)

Equity futures and options are derivative instruments that have a large number of underlying shares. 

For example, a Reliance call option has 505 underlying Reliance shares, or an Infosys futures contract has 1200 underlying shares.

F&O is risky because the derivative contract derives value from its underlying shares and a large number of shares are involved in the contract.

A small movement has the potential to generate huge profits or wipe out entire capital.

You need to understand the basic nature, inherent risk and terms of the F&O contracts before you start trading in them.

The capital requirement for trading in the F&O segment is higher than what is required for intraday trading. You will need to have Rs. 1.5 Lakhs to Rs. 2 Lakhs in your trading account.

You can use tools like Sensibull which can help you in building options trading strategies.

#3. Commodity Trading

Commodity trading involves buying/selling commodity futures and options. 

It is similar to derivatives trading except that the stocks have been replaced by commodities like crude oil, natural gas, gold, silver, aluminum, lead, wheat, gram and other commodities.

However, the commodities market is not as liquid as the stock market. Except for crude oil and natural gas, you should day trade in other commodities with caution because chances are that you may not find any buyer or seller.

For commodity trading, you need to understand the particular commodity cycle and factors like weather conditions and demand-supply that affect commodity prices.

The capital requirements for commodity trading range between Rs. 1 Lakh to Rs. 2 Lakhs.

#4. Currency Trading

Currency trading is cash-settled and is available only on four currency pairs

  • USD-INR
  • Euro-INR
  • GBP-INR and
  • JPY-INR

You get to trade in currency futures and options contracts which means that currency trading is derivative trading. 

You need to keep in mind the global forex markets, interest rates, inflation and the demand-supply factors before you trade in currency.

You can start trading in currency by keeping margin money in the range of Rs. 10,000 to Rs. 25,000.

Where to Start Intraday Trading

If you are a beginner then you should first start with intraday trading in stocks because it requires less investment and the associated risk is also less.

Starting with intraday trading is simply buying and selling of the stock according to the price movements and your views. You do not need to keep in mind the various other factors impacting these instruments.

You need to learn about technical analysis and have a winning strategy to trade intraday.

You need a trading account to start trading. If you don’t have a trading account, then I would suggest you open an account with Zerodha because

  • Flat Rs 20/trade even on trade with value Rs 1 crore
  • Good customer support as compared to other discount brokers
  • Better trading platform with charts and tools

Click here to open the Zerodha account

Resources for Learning Technical Analysis

There are tons of resources available on the internet to get started with technical analysis. You can get hold of anyone who helps you understand the topic easily. 

Below are some of the resources that you can look for learning technical analysis.

Zerodha Varsity – To know the basics of technical analysis

Trading View – for actual technical trade ideas and discussions

Other resources – Investopedia

Trading Strategy – Bollinger Band Strategy

The Bollinger Band is made up of a set of three lines where the middle line is the simple moving average of the last 20 candles price.

The upper and lower lines form the band on either side of the middle line. 

The upper and lower bands are 2X standard deviations from the middle line and indicate an overbought (excessive buying) and oversold (excessive selling) zone.

When the price moves outside of the bands, then the stock price is ready for a potential reversal. 

So, if the breakout is above the top band, you should sell the shares.

Bollinger band - Sell shares

You need to sell when the red candles re-enter the upper band and tend to move lower as shown in the chart above.

When the breakout is from below the lower band you may take a long position, i.e. buy the share when the green candles appear inside the lower band and the prices tend to move upwards.

Bollinger band- Buy shares

Note – That the above strategy does not work when the prices are moving upward (up-trend) or downward (down-trend) sharply. 

You need to wait until the trend gets over.

Common Mistakes to Avoid as Trader

  • Trading without using a stop loss
  • Getting greedy or emotional while trading
  • Randomly trading without any view about the market
  • Looking to capture a big move in a single trade
  • Not closing trades at the target (profit or loss) price
  • Using more than 10% of the capital for a single trade

Now you are ready for your first trade. 

PS – If you don’t have a trading account, click here to quick Zerodha account opening link.

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