Nitin Aggarwal | May 06, 2008 | 12:08 IST
Almost everyone finds intra-day (margin) trading fascinating. Most young and first-time day-traders feel all they need to do in this cakewalk is to have a dematerialised account, invest some money at the start of the day and take home a quick gain of 5-10 per cent each day.
For the uninitiated intra-day trading refers to dabbling in shares on a daily basis as against investing wherein you buy a share today and plan to sell it a few years or months down the line.
An intra-day trader has to deposit an amount with her/his broker that is known as margin money. Based on this margin money your broker will give you a trading limit that is generally a simple multiple of the amount you deposit.
For instance, if you deposit Rs 20,000 with your broker then he can allow you to buy or sell shares worth Rs 80,000 (Rs 20,000 multiplied by 4) on a particular day. At the end of the day you have to sell whatever stocks you have bought irrespective of profit or loss. This, in market parlance, is called as squaring off a trade.
Similarly, if you sell a stock first at a higher price and if you buy the same number of stock at a lower price on the same day then this is also termed as squaring off a trade. In both the above examples you are making a profit.
But things are not all that rosy as they seem to be. You may buy a stock at a higher price and the stock price of that stock may fall after that. Before the market closes at 3.30 pm everyday you will have to sell that stock to square off your trade. That is the most important rule of day trading. If you sell it at a price lower than your purchase price then you make a loss. Similarly, if you sell a stock at a higher price and purchase that stock again on the same day for a price higher than what you bought for, you again make a loss.
So day-trading is a double-edged sword which if not handled with care can hurt young and first-time day traders. Hence, in depth knowledge and a lot of insight is needed for intra-day trading. In fact for a novice, intra day trading can turn out to be a dangerous affair.
Does that mean you should completely avoid Intra day trading?
Well the answer is NO. However, one needs to be careful while trading and keep several things in mind before you jump into the choppy sea of intra-day (margin) trading. While hundreds of books have been written on tricks of intra-day trading here are 10 thumb rules that you must remember before you start trading intra day.
1. Never rush into a trade. Always reach the market at least 15-20 minutes in advance with your trading list in place.
2. Trade with a calm mind, maintain a sound balance between personal life and life in the share market; don’t let the two aspects interfere.
3. Don’t enter a trade if you are unsure of the trend (if prices will move up or down). Preferably start trading around 10.10 am (markets begin at 9.55 am every weekday; weekends are a holiday) to know the clear market direction.
4. Never risk more than 10 per cent of your trading capital in a single trade.
5. Over trading kills, never do over trading.
6. Remember that no one can predict the exact highs and exact lows. So never try to catch them.
7. Always maintain strict discipline in your trades. Remember to keep a strict stop loss and booking profits is a must (So that you know how much you can afford to lose).
8. Booking profits is very important and booking loss at the right time is even more important.
9. Never let a profit turn into a loss; always keep booking profits and raise your stop loss accordingly.
10. When in doubt the best thing to do is ‘Get Out’, and don’t ‘Get In’ when in doubt. Simply put, when in doubt prefer staying at home and enjoy the company of your loved ones.
I posted this article on rediff few years ago. Thought it should be part of my blog as well.