Intraday Trading: Really Worth?

Fund-Matters | July 6, 2019 | Investing, Investments, Personal Finance, stock market, Stock Market Investing, Stocks, | 0 Comments
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​​​Intraday traders are those people who enter and exit stock positions frequently within the day, in order to profit from the short-term movements in stock prices. Some hold positions for hours, while others hold their positions only for minutes. ​

The attraction of intraday trading is that traders can do large volumes by deploying less margin and their capital is freed at the end of day. The pitfalls of intraday trading are that their margin can be wiped out in volatile markets. Even when the intraday traders make some profits, most of their profits are eaten away by security transaction tax, brokerage, GST on brokerage, stamp duty, exchange charges, short term capital gains tax etc.

Many advertisements for various trading platforms and brokers may lead us to believe that we can earn lakhs of rupees with a small capital through day trading. However, the reality is that few people can actually earn a living from day trading.

Critical factors to achieve success in day trading:

1) Trade with the Trend: The probability of trend reversal within the day is less. Hence placing a bet for trend reversal may not work on many a day. Billionaire investor Rakesh Jhunjhunwala says, ” Trend is your friend”. Trade the trend rather than contradicting the strongest collective force of market.

2) Tweak your stop losses with volatility of individual stocks:
Some large stocks have the average volatility of 1 to 2% a day, while others have up to 5% average volatility per day. Your stop losses need to be tweaked according to the volatility of individual stocks. For example, trading stocks with 5% volatility with a small stop loss of 1% may be un-viable and the chances of stop loss getting triggered are quite high. 

3) Avoid Pyramiding:
Often day traders average their losing trades, also known as ‘pyramiding’. It is similar to making a small cut into a big one. Rather ‘Inverse Pyramiding’ works well. Buy a tranche at an entry price with a small stop loss and reduce your cost by buying a few more tranches upwards and stay with rest of the quantity till you make most of the trend.

4) Avoid trading on some weird days:
Many day traders are compulsive traders on all trading days. Respect when the market says, it’s not your day today. Market will indicate that it’s a bad day for you with a series of weird movements and stop loss hits. Shut the screen for the day and take a break for yourself.

5) Choose highly liquid shares: Day traders must square their positions at the end of the trading session.This is easy if you are trading in large-cap, index-based stocks, which are very liquid and get traded in large volumes. Don’t dabble in mid-cap and small-cap shares, where the  the traded volumes are not very large. You could end up holding such shares that have no buyers at the end of the day. 

Risks of Day Trading

1) Capital Loss:Even if a majority of trades are profitable, considerable up-front costs such as hardware, software, interest, communication charges, taxes, brokerage etc eat away the profits. A few loss making trades can wipe out all your past profits.
2) Market Movement:
It is hard to make money when the market moves in a narrow range in either direction during the day.
3) Addiction:
Day trading is an addiction like drugs. It’s much more addicting than any other kind of gambling.

To sum up

In day trading, some traders make small profits while many lose big. It is a game of small bucks for traders and big bucks for brokers, exchanges and government.  If you’re thinking about investing, then don’t buy into the day-trading hype. Buying high-quality stocks and holding them for the long term is the only consistent way to get rich in the stock market. 

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