The art of making money trading daily is called Madness and people ‘often’ get fooled by this randomness and the notion that it is very easy to make money trading in the market daily. How can one make a decent income intraday trading? Is one of the mysterious questions one can never answer with the utmost contentment of the inquisitor! However, as you see, I have highlighted the word OFTEN; so it doesn’t mean that Intraday Trading (daily trading) is a complete failure; but there is no shortcut to success. Although a misconception – if it was so easy to make money in the markets then we would have had a lot of ‘Wolfs’ on Dalal Street.
In the words of Mr.Parag Parikh in his book Value Investing & Behavioural Finance he mentions about the 6 most prominent characteristics in the human nature – Laziness, Greed, Ambition, Self-Interest, Ignorance, Vanity; which perfectly describes the reason behind the question of interest here.
Considering all the above facts and not beating around the bush, let us come to our main motive here – How can youearn through intraday trading; there are many ways that are sought after by the intraday traders in today’s ever growing technological world. Some of the ways that we are very well aware of are as follows:
- Trusting your broker blindly
- Trusting your broker wisely
- High Frequency Trading using Algorithms
- Low Frequency Trading using Algorithms
- Research/Annual Reports
- Reading Newspapers, watching news channels and wasting your time
- Tape reading/ watching price action.
We are going to discuss these points either in groups or as individual stand alones for the convenience of the readers.
Trusting your broker blindly/wisely –
It’s an old saying that in a gold rush, the miners may or may not make money, but those who sell them the picks and shovels get rich. This is certainly true for parts of the stock markets, especially short-term trading by individuals. As all of us who have a demat account are aware about all the amazing ‘tips’ that we receive from our beloved brokers. Some of these so-called tips are either generated by the self-interest of the broker or have actually happened already. But not all tips are bad and are to be ignored. One has to realise the depth of the rationality behind the tip before acting on it. For example – if your broker tells you that say a Stock A which is a banking company stock has its results due tomorrow and has shown an amazing upheaval in the returns and its NPAs are expected to reduce and is the only banking stock to have done that in a long time and hence it’s a high conviction‘buy’ – this argument makes sense; but even though one should remember you are not the only one with a broker at your disposal, the entire market is looking at that stock and maybe the market has already priced in the news. On the other hand if you get something like – Buy 50,000 quantity of Stock B with Price X Stop loss Y Target Z and hold for 30 days – something that we generally get from our talented brokers is what only a fool can believe in. So one has to be sensible about taking and acting on tips and other’s views. The well-known adage about acting on other’s trade suggestions is “If you enter a trade on someone else’s entry, you have to know the time of his exit and you can’t practically stalk someone all day”
HF/LF Trading using Algorithms –
With the advent of new generation technology in the finance industry, self-learning machines and algorithms, traders have started using such machines optimally at their disposal to make money in the intraday markets and some have even being successful at it. The edge that such traders have over normal human beings trading intraday is that they have a digital brain that does all the computations for them and finally decides on a trade based on the fact if certain parameters are satisfied. As a result of this they don’t have to watch a lot of markets and a lot of stocks at the same time as all of it is computed and analysed digitally in the background with the algorithms running. And in a High Frequency setup, the trader doesn’t even have to execute the trades himself, but that kind of setup needs you to have sufficiently deep pockets. In a Low Frequency Trading system however you have to have a basic knowledge of coding and you can design an algorithm on your own and execute trade as and when the code gives you a signal. This type of day trading is tried and tested and works well if you have a basic understanding of coding and technical strategies. But it all comes with a cost.
Also Read : How a student can pursue trading?
Reading Research Reports and Newspapers/ Watching news channels –
These can be a great source of information to both guide and divert you onto a path. It goes similar to the first point of discussion, as to which news to buy and which news to dump. News channels in India mostly sell you a sweet story, so it seems very good during the time when the market is on an up-trend, whatever stock the on-show ‘traders’ sell you, you see it going up and you start buying little realising the euphoria in the market when it generally becomes easy to make money in the markets – buy the fear, sell the greed is a well-known saying amongst traders and value-investors and this is usually the trap which the bourgeois fall into. There is no shortcut to success. If you read annual reports, research reports, newspapers like ET, FT; that is a good deal of information which you can process and take a decision for yourself but you have to remember to filter out the noise just like in the example I mentioned above.
Tape Reading/Watching the price action –
Well, to be frank I have kept my personal favourite for the last. This is a very old art in the books of intraday traders and has been flowing down from great players like Jesse Livermore. This generally gazes in on analysing the market sentiment related to a stock or an asset class that is been traded on the exchange by watching its price action very closely. One of the most valuable tools that you can use to confirm or deny or your day trading positions is the time and sales window, aka the “tape”. The tape details order flow or money flow in a particular security by displaying all transactions that have been executed. While each broker may provide different data points, time of trade, price, size, and condition (executed at bid or ask or between) are common data points displayed by this window.
The two basic principles of any technician’s arsenal are price and volume; understanding the interaction between the two is paramount to successful day trading. Tape reading involves both, and if used correctly, dramatically increases the odds of your trading working out. Your goal with tape reading is to follow the money. Strong order flow activity at key support and resistance levels will give you clues as to whether the breakout is for real or not. Trading with the time and sales window requires trading with patience. You cannot go out and buy or short a stock because you see the tape speeding up a bit. You need to be aware of support and resistance levels and also combine the message of the tape with price pattern formations. The speed of the order flow can be extremely fast and confusing; it requires quite a bit of practice in order to get used to understanding the true message. Remember, every stock is a different story and tends to trade differently. It is wise to review the way in which the tape trades for a couple of minutes before entering a trade. Reading the tape requires you to train your eyes to scan for changes in character. This can be very straining, and needs a lot of patience.
Also Read : Building a stock portfolio
All of the above ways mentioned, the readers are made aware of a disclaimer notice that we hear very often in the mutual fund ads – Investments are subject to market risks. And to be fair high reward comes with high risk and as we all trade the market intraday for high rewards, we should very well be ready to digest the high risks involved behind the act of intraday trading.
In order to balance the risk that investing in stock market can have on your savings, one can follow a very well know concept called ‘100 minus your age’. According to this concept, the younger you are the more risk you can take – so say you 20 years old and assuming you have savings worth Rs.10,000 at your disposal and you don’t know what to do with the money; the 100 minus your age rule suggests that you invest 20%(Rs.2,000) of your savings in debt (FD, RD, Govt. Bonds etc.) and you invest the remaining 80% in the stock market/equity or a riskier asset class.
Since we all have the knack to minimize the gratification period, it is better to extend this rule further to the latter half of our investments. So accordingly, if we have Rs.8,000 to invest in the stock market; we can divert 20%(Rs.1600) to intraday trading which is a high-risk style of trading and we can invest the rest 80% (Rs.6400) to a much safer option of putting money in the stock market like value investing or buy and hold.