Is Day Trading for You?

Day Trading in stocks often considered attractive, ambitious and highly profitable. My buddy shouts “Day Trading? You are going to lose your money man!”

OK! What do you think?

What is a Day Trading?

Day Trading is, taking a position in the market and closing your position by the end of the day, if not well before. A day trader could hold a position from few seconds to few hours. It is all about making profits using price movement of stocks that occurs in a day.

If you think that price of a stock would move up, then you are bullish and you buy. When the price moves up, you sell the stock, book profit. Likewise, if you think that price of a stock would move down (a fall), you are bearish and you sell. When the price comes down, you buy the stock, book profit. It Works either way.

“If it works either way, what could be wrong about that?”

Well, it is fairly easy to learn and highly difficult to master.

Financial Leverage

In Day Trading, you pay only a margin amount. Say if you are obliged to pay 30% of the stock price, it gives you financial leverage.

Two Facets of the Coin

Day Trading could make you rich, could pull money from the market, and could be anything you dream about. Unfortunately, the coin has the other facet too. There is a fair amount of chance that the market could throw you out!

What is “Traders Psychology” on earth?

It does not matter whether you agree with me or not, there such a thing called Traders Psychology. To become a successful Day Trader, you must have the emotional intelligence it takes. I don’t think it is good idea to develop sleep disorder or hypertension, for the reason you are making profits in stock market.

The good news for you is, you can be wealthy and healthy by Day Trading, provided you understand how your psychology prevents you from loving what you do.

It is not enough to earn thru trading, it is important that you have to love it!

I often see people who are poor in managing emotions, sitting at trading terminal with racing heart. One could become greedy or fearful. Greed & Fear are the two dynamic forces that move the market, especially for a Day Trader.

Don’t try to kick the market back if it kicks you. No getting even, no chance to display your ego, nothing! Learn the secret of becoming market’s beloved. Try to know when and where the market opens its door for you to enter and to exit. Be patient and learn from experience. But don’t pay much for your learning. Keep it economical. There comes a Trading Plan

Trading Plan

You know, software programming is an art itself. Still, the programming community gives, constant efforts to make things better for programmers, there comes Software Engineering. Likewise, a system that undermines your emotions, gives a protocol to communicate with the market is all about a Trading Plan.

There is no best Trading Plan that suits everyone. You have to tailor your own. A good plan must tell you what and what not to do, when and when not to do, how to handle surprises the market gives you. Basically it is procedure that tells you how to go about trading, in strict sense. A Day Trading with no Trading Plan is like you drive the highway with no direction, with no road map.

Market – The Ground Truth Reality

No way you can escape from reality. A seasoned trader always smells the market. The market talks to those who have an intimacy with it. Like there are ways to develop intimacy with people, there are ways to develop intimacy with the market. You must watch, you must listen to and you must understand the dynamics of the market. OK! I hear you saying “Enough of pessimism!” I just wanted to show you where are your breaks before showing you the accelerator. No more, no less.

Strategies

The strategies of day trading basically assume that Market Discounts Everything. It means the market shows you what majority market player’s intention. It does not matter what you believe. Don’t swim against the current. Move along the direction. This is the essence of “smelling market trend”. There are popular strategies those are tried and tested to help you. I would like to tell you about the popular ones.

Scalping

Scalping is the trading where the trader buys or sells a stock for very little profit. Say for 0.10 or 0.15 cents / paisa or an appropriate amount to your currency. Scalpers make quick profits and they do not expose themselves to Risk much. To practice scalping, you have to buy/sell for very little profits in very little time. You do this again and again till you get a decent profit. Frequency of trade would be usually high for scalp trader. In scalping, it is important that you must exit your position quickly if you find the market turn against you. Your success is determined by the number of time you won out of your attempts. So it is obvious that one should lose less then what one earns.

Momentum Trading

Momentum trading is a method where you wait till you get a momentum on any stock. Any stock can move up or down in price with a drastic acceleration, at times. That accelerated movement in price is known as momentum. There could be a bullish / bearish breakouts and many other market parameters can cause a momentum. A momentum player is one who book profit on a stock’s momentum price movement.

Range Trading

Range trading is really an interesting trading activity. You buy and sell stocks within a Range. The range is defined by support and resistance levels of the stock on the day. Resistance is the price, above which the stock may not move (if you don’t consider surprises). Support is the price, below which the stock may not come down. Thus, knowing the supports and resistance, you can figure out a range in which the stock would be moving up and down. Knowing the range, you can make profits.

For a good range trading, it is universally accepted fact that a stock must have good volatility. The volatility of the stock is the tendency of the stock to move up and down in prices, several times a day. See, you can’t waste your time, waiting too long for a stock to move up or to move down. A volatile stock is one that moves up and down frequently. This tendency could be measured by beta value of the stock. I suggest you do some readings on beta value, support and resistance, though I plan to write about them sometime later.

News Playing

News playing is a popular strategy where you buy a stock if positive news hits the market and sell a stock if the news is negative. It may look nice and easy. I warn you it is not. Often you may not now what is news and what is fact. Though news playing is favorite method for many traders, I personally discourage it for following reasons, unless you are sure about the news.

Do not forget the fact that promoting news is a “media business”. Further, technical analysis argues that Market Discounts Everything. It simply means the price movement takes in own course of action irrespective of your own view on certain news. It does not matter what do you think about the news, it is all that matter what the majority market players think about the news. It is not the news that hits the market; it is perception and sentiment that hits the market. Do not expect the market to behave in rational way always!

Go With The Volume

You can choose any strategy for your day trading; still there are some simple basic things you must know. One of them is Volume. Any price movement that is not supported by volume in the market is vulnerable to turn otherwise. It is a basic fact that a change in volume always indicates a change in stock’s trend. I suggest you some reading on Volume Indicator and Trends.

What Pain You Can Afford?

Before enter a trade, clearly decide how much money you can afford to lose on the trade. In other words, be strict in your exits if the market turns against you. That is the “stop-loss”, which prevents you from incurring more loss. In my opinion, a good trade, especially in range trading, 2% loss is smart, though it could be ambitious for you.

Accept Reality; the STOP LOSS

It Is All About Winning The War Not Every Battle!

Good day trading is not about winning every battle; it is about winning the war. There is no system that could give you profit on every trade you do. Learn how to keep your loss smaller than the profits you make. You can earn even a penny; you must be able to earn it consistently. Unexpected profits and unexpected loss indicates something wrong with your trading plan.

What Is The Source of Your Trading Capital?

Surplus money? Your savings? Money borrowed? I cannot give any comment on this, as it is highly subjective and relative. It depends on your confidence, skill, your Traders Psychology, etc., WAIT ! I strongly suggest you to practice, to test your strategies, and to refine your emotional intelligence with very small trading capital, irrespective of the source of money. It is a complex decision you must take and nobody else could do it for you. Good trading skill is not something you can get overnight; it takes its learning curve. Love learning. Be patient till you become skilled. I suggest you some readings on Risk Management, when it comes for day trading.

Risk Management

Risk management is something you can’t afford to forget. A good risk management includes a good trading plan, being strict in stop-loss, and everything you find sensible I don’t write. I told driving highway with no direction when it comes for trading plan. I would like to say it is like a blind driving highway if you don’t have a risk management system that works for you. Caution!

Trading Discipline

Stick to your trading plan and do not get deviated by emotions (Traders Psychology)

Do your homework and plan well before the market time. Don’t alter your plan during market hours unless you are an expert trader (obviously, this article is not for an expert trader)

Quit your broker’s office when you think you don’t understand the market that day.

Never trade when you are ill or worried.

Even though you practice all the above said, there could be situations where you make a huge profit or a huge loss. If so, stop. Do not think of trading for a day or two (don’t rush; market will be there for you always), then, do think what had happened for a day or tow, then prepare yourself for the next trading day.

Do You Want a Conclusion?

Yes I have one. Day trading needs professionalism. It is a skill, an expertise. You have to lean, practice, test and refine. I would like to say “You can live on day trading if you become an expert, by understanding it little by little”

Can You Live on Day Trading?

Oh! Let me ask you now “Can you live on day trading?”