"The key to successful day trading is being consistent and doing things which are repeatable. Hence tone down your expectations, if you are generating between 3-4 percent return per month," says Karthik Rangappa, VP, Educational Services at Zerodha.
By Karthik Rangappa
One of the very few luxuries markets offers is ‘Time’. Think about it - if you buy a stock today, and it goes down tomorrow, you can still give it ‘time’ with a hope that it will bounce back.
However when you day trade, the luxury of time is taken away from you. Each day the scores are settled, forcing you to be fair and square for the day. This makes day trading a very tough profession, with a need to be highly consistent and disciplined.
Needless to say if done right, day trading can be highly rewarding. If you are getting started on day trading, there are a few aspects that you need to bear in mind.
Set Realistic Expectations:
Many traders live with a notion that they can double their money every month. This is equivalent to a fairy tale in the markets. This can’t happen. Even if one manages to do this, they should attribute a large portion of this success to luck.
The key to successful day trading is being consistent and doing things which are repeatable. Hence tone down your expectations, if you are generating between 3-4 percent return per month, trust me you are doing a phenomenal job.
Stop Speculating, Start Trading:
There is a difference between the two. Trading requires you to design a strategy. Every design has a reason behind it. If you cannot find a valid reason to trade, then you are blindly speculating on everything that moves in the market, which is a sure shot recipe for disaster.
Typically the valid reason to trade should be a ‘trade signal’ from a trading strategy. The strategy can as simple as a price volume breakout, moving an average crossover or as complex as neural network algorithm. The point here is that you need a strategy to trade, without which you are simply speculating.
Once you develop a hypothesis to trade, backtest it on historical data to understand how well the hypothesis stands against the historical market data. Make sure the historical data that you choose covers different market cycles.
By doing so you will understand how well the hypothesis stands against the test of times. Once you are satisfied with the backtesting results take your strategy live and start scouting for opportunities.
Keep Costs Low:
There are certain costs involved while day trading, make sure you keep these costs under control. Some costs like STT, Stamp Duty, and Service tax are beyond your control and there is nothing much you can do about it.
However make sure costs like brokerage, transaction charges, and other services charges are low. Remember if the costs are low, your odds of winning are higher.
Day trading requires you to have some IT infrastructure, nothing complex, just some basic stuff. To begin with, ensure you have a reliable broadband connection. Make sure you have access to the software which helps you visualize price charts, analyze price volume action, backtest & deploy a strategy in the live markets.
Make sure the price charts help you view both live and historical charts. It is preferable to have all these features baked into single software which also lets you directly trade and place orders in the market.
Don’t allocate all your capital to day trading. Split them wisely. A good way to split would be 60 percent to long-term investing, 30 percent to intraday trade, and 10 percent in cash.
Make sure you are knowledgeable about market-related topics. While eventually, you can settle down as a pure quantitative trader or a fundamental investor, but to begin with ensure you know about all topics related to markets.
Be it Technical Analysis, Fundamental Analysis, Futures, Options etc. In fact, you will evolve into a through market professional only by learning all the key aspects of the market.
There is plenty of high quality, practical content available online for free, make complete use of it. Don’t make the mistake of paying the so-called ‘market expert’ a huge fee with a hope that he will teach you all the practical aspects of trading.Disclaimer: The author is VP, Educational Services, Zerodha. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.