Day Trading: Is This Your Cup of Tea?

If you’re making money with other people’s money, then perhaps day trading for a living is what you’re doing. May be you do trading with your own money and if you lose your trading money, then you have no one to blame but yourself. This is the style of trading that lasts daytime hours only, from the moment the stock market opens until it closes in the afternoon. You can do a lot of trading in that amount of time. It may be a good way to watch your money grow too. But the saddest part is that mostly you lose your money. Maybe it is your cup of tea, maybe not, only you can decide.

What is Day Trading?

Day trading or popularly known as Intra-day trading in India is the style of trading that is purely based on speculation in equities and F&O within the same day. You have to square off your position within that trading day. What I mean here is that if you buy stocks or F&O instruments, you must sell them off before the market hour ends. And if you sell or short stocks or derivatives, you’ll have to buy/cover them up before the market closes. Traders who trade in this way with the motive of profit are truly speculators. Day traders exit their positions before the market close to avoid risks and price gaps the next day’s price at the open.

In this sort of trading you take a position in stocks with a view to square off your position before the market closes. Day trading for a living means a trader usually trades multiple times a day for a few points per trade and closes all positions at day end. The goal of the day trader is to capitalize on price movement within one trading day. Unlike investors, the day trader will hold positions for only a few minutes or hours, and never overnight.

Day traders generally employ margin trading or leverage trading. It’s a system which allows the trader to open positions much larger than his own capital. If you have $1000 in your account, you can get up to $10000 for your margin trading. As the margin interest is typically charged on overnight balances, the trader may not pay interest fees for the margin trading. Still, you’re running the risk of a margin call. In India, several brokers give you up to 10 times for the leverage trading.

What Day Trading Pattern Signify to You.

Day trading is often a misleading term where you’re not supposed to hold on to your stock position overnight. You must close your position before the market closes. One conviction that day traders often put forward is that it is safe and you’re not supposed to expose yourself to the potential losses in case of the stock market crash the following days due to bad news that can affect your stock prices. This may not always be true. Unless you are well-funded and have sound technical knowledge, you’re very much prone to losing your capital fast. It ultimately eats away your hard-earned money. Con artists are always out there in the trading market today who are just there to take your money.

Greed and Fear plays an important role in the trading market. Because of this greed, you may hold your stock overnight in a hope that you’ll get a chance to sell or buy it the next day. And then you no longer be a day-trader, you will turn to a positional trader. Many a time, majority of day traders close their position before stocks start giving them a significant profit because of fear. So day trading is not everyone’s cup of tea. Professional traders who earn their bread and butter by trading know this paradigm.

The main advantage of intra-day trading is that you don’t have to come across any overnight risk. Because positions are closed prior to the end of the trading day, news and events that affect the next trading day’s opening prices do not affect you anyway. Intra-day trading has greater leverage on your capital because of the low margin requirements as your trades are closed in the same trading day. This increased leverage can increase your profits if used wisely.

What is the Difference Between Day Trading and Scalping?

Day Trading: It once had exclusively been for financial firms and professional speculators. Many day traders are from banks or investment firms as specialists in equity investment and fund management. They even use bots or resorted to algorithmic trading to atomize the whole process of trading.

Scalping: It’s a specialized technique that day traders usually use. In this, the traders usually hold their position for a few minutes or seconds to earn small profits. This type of day trading involves the rapid and frequent buying and selling of a large number of stocks or currencies within minutes or seconds. The goal here is to earn a small per-share profit on each transaction while minimizing the risk.

What are the Effective Rules for Day Trading?

You will have numerous day trading rules or strategies out there in the arsenal of many successful analysts. You sometimes confuse which are the best bet to give you some edge. From my experience I can tell you that unless you improvise your trading style and good money management, you are doomed to lose your entire capital base. But above all, your technical expertise is the central point that can give you an edge. But the classic technical chart patterns are mostly lags in achieving desired results. This is because they typically form after the stock price already achieved its target.

Why This Happens?

This is because of the fact that everybody is watching these chart formation. It’s like a jet heading an unknown aerial path leaving behind fume trace. Despite the different traders put into service the variety of technical indicators and oscillators in their day trades. Your fundamental knowledge or analysis is something that you can’t do without. Of course, fundamentally good momentum stocks can guide you to find the direction of next likely move.

Usually after great move, the momentum of your stocks can be exhausted and is likely to correct. Further day trading is a short-term trade. Historical price volatility of stock plays an important role. If average price volatility (high/low difference in a given day) of a stock is high, you’re able to buy it low and sell high.

Support and Resistance: Many day traders employ daily support as their trading opportunity to enter into a stock or derivative and make use of daily resistance for exiting from the stocks. I find that the daily support-resistance works great in the day trading. Some day traders target specific time of the day. They involve in trading in the opening session when the market opens. Some like to adapt to mid-day trading or close-day trading.

Moving Average: A myriad of intra-day traders deploy Moving Average of different days such as 5-Day, 8-Day, 9-Day, 13-Day, 20-Day (SMA or EMA) and so on in their style of day trading. I like to apply a small Simple Moving Average such as 13-Day SMA and 30-Day SMA cross-over. But the focal point here is that you can’t fully depend on it. If that is so easy, every trader will make fortune out of the stock market. Is that true? Nope.

Candle Stick Chart: This is one of most practical, precise and reliable chart pattern that is being followed by numerous traders around the globe. The Japanese candlestick chart pattern revolves around the emotions and sentiment of traders that have a major impact on the stocks. Candlesticks pattern help traders to gauge the emotions surrounding a stock. This help them make better predictions about where that stock might be heading. Despite that I am not a great fan of candlestick chart as it sometimes not work equally for every stock.

Relative Strength Index (RSI): This is one my favorite indicator to adapt to my trading system. When RSI of a stock is in a highly oversold territory or overbought zone (say less than 10 or above 90), it usually bounces back steadily. Of course, fundamentally superior stock reacts wildly. I find this very reliable for the best stocks. But at the same you need to check some other reliable trade set up such as price escalation with higher volume.

Bollinger Band (BB): This is another of my favorite indicator to follow in the true perspective. If you check a price chart by plotting BB, you’ll find it mostly hovering around the lower band and upper band. When you find a stable stock to reach below the lower band and RSI in the oversold zone, you can expect to see a short-term up-move in a couple of days. Likewise you can anticipate a down-move in the reverse case.

Option Chain Analysis: This works superbly in day trading if you analyze it and apply it correctly. Option Chain is nothing but an Open Interest (OI) spotted in an option chain. If you dig it out precisely where the highest OI exits in a Call side, you can take it major resistance level and inversely highest OI in the put side tells you about a strong support level. So, when you see the price level hang around the highest OI in the put side, you can find an opportunity to buy the stock and sell it around the second highest OI on the put side.

Elliott Wave Principle (EWP): This one is my most favorite analysis in my trading or investing system. Of course, I always check fundamental parameter before picking up any stock. The most interesting thing about EWP is that you need not check other myriad  of indicators/oscillators or system that can consume a lot of energy and time. I find EWP coupled with Fibonacci ratios is the fascinating and the most accurate one. I learned EWP from a book titled “Five Waves to Financial Freedom” by Ramki N Ramakrishnan. He analyzed the wave theory with real-time examples.

Another book that I have read recently is a book all about an improvised classical approach for day trading. It’s an excellent book titled “How To Day Trade for A Living” In this, the author Mr. Andrew Aziz talks about Reversal Trading, VWAP (Volume Weighted Average Price), Moving Average, Support and Resistance. This full-time professional day trader frequently uses a specialized pattern known as Bull Flag Momentum.

My Trading Setup: I improvised my own day trading setup that is derived from my trading experiences in the market so far. I always select high beta or low float stocks and take 5 min/15 min bar chart. Find the broader direction in the weekly chart of the stocks with the help of EWP. And after getting a fair idea I revert back to 5 min or 15 min bar chart.

If the direction of stock tends to show an uptrend, I look for a 13-Day/30-Day SMA cross-over(13 crosses above 30). A rising RSI above 30, a BB that breaks below the lower band, and the stock price around the daily/weekly support level. Then I look for the highest OI at short/put side of the option chain. Now, with the help of EWP and Fibonacci ratio, I would set the target price. I then buy the stock and sell it accordingly around a daily or a weekly resistance level.

Similarly, when a stock tends to show a downtrend, I would do the vice versa. That is, a 13-Day SMA crosses below 30-Day SMA, a descending RSI below 70/80, a BB that breaks the upper band. And a stock price that is hovering around its daily/weekly resistance level, and the highest OI at the long/call side of the option chain. And lastly find the price target by applying EWP and Fib ratio that should coincide with the daily/weekly support level. This way I minimize the losses and pocket some bucks.

The Final Takeaway: If you want to get the desired success, you need to follow an effective and reliable system in day trading. The day trading for a living may not be your cup of tea. This perhaps is not my cup of tea due to unmanageable stress to handle. I seldom go for intra-day trade. One thing you should always keep in your mind for day trading is the tax implication. In major part of the world, day traders or short-term traders are significantly taxed by the authority.

If you loved to read my article, please stop-by and leave a comment.

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