Day trading refers to a form of share trading where you buy or sell stocks within the same trading day. The motive behind this is to gain from small price fluctuations throughout the day.
Since the settlement is done on the same day, this form of trading takes away the luxury of time where you could hold on to your stock(s) in case of a price fall, hoping it to bounce back in the coming sessions.
There are numerous day traders who dabble in the market with the hope of making money by trying to cash in on the market’s unpredictable behaviour.
However, successful day trading is an art which requires a disciplined approach. If you are contemplating this form of trading, then keep in mind these four factors which can bring success.
Create a trading strategy
For the exercise to be rewarding, you must create a trading strategy. Basically, there are two distinct types of trading approaches – discretionary and systematic.
The former entails making decisions based on the current factors such as internal and external, which you believe are going to make an immediate impact on the market.
On the other hand, a systematic strategy deploys looking out for distinct signals for buying and selling, which is also known as rule-based trading.
It is a systematic trading approach which includes back-testing using historical data along with a qualitative risk management system.
A systematic strategy keeps away emotions out of investment and is backed by rigorous risk control. It has the potential to generate better rewards.
Get yourself the right IT stuff
For making the right calls and create wealth out of day trading, you need to have the right IT infrastructure. Since trading is completed within the same day, it is important for you to be on the top of your game and keep track of the market's every movement.
Hence, it is crucial to equip yourself with a high-speed broadband internet connection and software that helps you visualise price, and analyse price charts in real-time.
It is equally essential to get a holistic picture of live and historical price charts to call the right shots. Opt for software which, along with these features, allows you to place a trade order directly. Since you don’t have the luxury of time, every second matters.
Equip yourself with the required knowledge
Lack of knowledge is a fundamental reason why most people fail in day trading. Arming yourself with the requisite know-how can help you make prudent choices.
You must know the market terminology, and have a thorough understanding of how to analyse a stock including technical analysis, Price-to-Earnings (P/E) ratio, Earnings per Share and Price/Earnings-to-Growth (PEG) ratio, among others.
Thankfully, there is abundant reading material available online, and going through these on a daily basis can help you acquaint with the various market terms.
Also, many brokerage houses offer integrated courses on day trading, enrolling in which can help you in understanding the nitty-gritties involved in the process.
While reading can help you get started, it’s your practical experience that’s the biggest teacher. When you trade often, you will learn several key lessons which are not present in the books. Keep recording them for better outcomes.
Allocate your capital wisely and avoid investing on borrowed money
Since market movements are hard to predict even for the soundest investor, make sure to allocate your capital wisely. Instead of committing a lump sum, start small.
Also, don’t invest on borrowed money as it can sour relationships and impinge on critical life goals. Investors often feel that by making the right moves, they can double their investment overnight through day trading. This is nothing but a myth.
A cautious approach, coupled with discipline, is the recipe for success. Also, make sure not to give in to emotions and follow a herd mentality. Pick up fundamentally-sound stocks and avoid acting on free advice(s) which promise bumper returns.
(The author is Personal Wealth Advisory, Edelweiss)Disclaimer: 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.