Friday, June 17, 2011

Rules of Intra-Trading

Follow these basic tenets to avoid losing your shirt in this high-risk arena

 Invest what you can afford to lose
Intra-day trading carries more risk than investing in stocks. Invest only the amount that you can afford to lose. An unexpected movement can wipe out your entire investment in a few minutes. In January 2009, the Satyam Computer script fell more than 80% from Rs.188 to Rs.31 in one day. If it is a leveraged position, you could lose more than you invested

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 every day. Don't dabble in mid-cap and small-cap shares, where the traded volumes are not very large. You could end up holding shares that have no buyers at the end of the day.

Trade only 2-3 scripts at a time
It's prudent to diversity your portfolio when you are investing in stocks, but when it comes to day trading, confine yourself to just 1-2 stocks. You can have up to 8-10 large-cap, index-based stocks on your watch list, but don't trade in more than 2-3 stocks at a time. Stock movements need to be tracked closely by the day trader and you won't be able to monitor more than 2-3 stocks at a time.

Research watch list thoroughly
Read up on the 8-10 stocks on your day trading watch list. You should know about all forthcoming corporate actions (stock splits, bonuses, dividends, result dates, mergers, etc) as well as technical levels of the stock. There are websites, such as or where you can feed in the price (high, low and closing) to know the resistance and support levels.

Fix entry price and target levels
Before you buy, fix your entry price and target level. The psychology of the buyer changes after he has bought a stock, which could interfere with his judgement and nudge him into selling too quickly even if the price moves up marginally. This might cost him the opportunity to fully gain from the upside. If you set yourself a price target and adhere to it, your psychological frame will not change.

Use stop losses to contain impact
A stop loss is a trigger for selling shares if the price moves beyond a specified limit. It helps the buyer limit his losses in case the share belies his expectations and moves down(or up). Suppose you buy 20 shares of Reliance at Rs.940 each and set a stop loss of Rs.920. If the share falls to Rs.920, your shares will be sold. In this manner, your losses will be curtailed even if the share drops to Rs.900. A stop loss takes the emotions out of the decision to sell.

Don't be an investor
Day trading and investing are like chalk and cheese. Both involve buying shares but factors considered are completely different. One takes into account technical data, while the other looks at its fundamentals. Don't try mixing the two. Often, if an intra-day bet goes wrong, the buyer does not book his loss, but takes delivery of the shares and then waits for the price to recover. This can be a costly mistake because the shares were bought with an ultra short-term horizon. They may not be worth investing in.

Book profits when targets are met
Greed and fear are the two biggest hurdles for the day trader. Just as he should not flinch from booking losses when the trade goes wrong, he should book his profits when the shares reach his target. If he feels that there is more upside to the stock, he should reset the stop loss. Suppose you invest at Rs.100 for a target of Rs.110 and set a stop loss of Rs.95. If the price goes up to Rs.110 but you are bullish, raise the stop loss to Rs.108. This will reserve some of the profit.

Don't fight with the market trend
Even the most sophisticated analysis cannot predict which way the market will move. All technical factors may be bullish but the market may decline. Technical factors only point to the likely movement of the market, they don't guarantee it. If the market movement is not as per your expectations, don't try and be a contrarian. You may end up losing more.

Small is beautiful
While stock investments can yield stupendous return, be content with small gains from intra-day trading. Day traders get a leverage of almost 3-4 times their investment, so even if your stocks go up by 3%, you would have earned 9-12% on your investment. In any case, it's rare for large-cap stocks to move by more that 5-6% in a day. Even if you get a return of 10-12% on your capital, it's not bad for a day's work.

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