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Intraday trading is the buying and selling of the stock
on the same day. When you trade intraday, the net position at the end of the
day is zero, so there is no delivery. That is a unique feature of the rolling
settlement system in India. It has opened up the floodgates for intraday
trading as the trader can get leverage and also rapid churn. However, that is
easier said than done and traders often complain that they lose money in
intraday trading. These losses arise because traders do not maintain some basic
ground rules. Here is why intraday traders end up losing money.
6 reasons
why intraday traders could end up on the wrong side
1.
You trade
like a cowboy and shoot from the hip. There is a popular misconception that
trading intraday is about being macho and taking big risks. If you stake all
your capital in a single trade, you are obviously not going to survive for too
long. In reality, trading intraday is a lot more about discipline than even delivery
buying. When you buy for delivery, you pay the amount and hence you can afford
to wait. In contrast, intraday trading is leveraged and hence risk management
becomes the key.
2.
Trading
without capital loss limits is the second mistake most intraday traders make.
Capital loss limits must be placed at various levels. You must clearly define
how much you are willing to lose in a day, in a week and overall. For example,
if your capital is Rs2 lakhs, you can set a 5% maximum loss target for a day
and 25% as overall loss. At that point you must stop trading and revisit your
strategy.
3.
Not being
passionate about stop losses and profit targets is a common reason for losses.
When you trade intraday, you need insurance both ways. You need protection from
big losses and from losing profits. This can be best addressed through stop
losses and profit targets. Intraday traders who do not set such limits at the
time of order placement are more likely to lose money.
4.
Not being
the decision maker for all your trades is a common reason for losses. What does
this mean? Quite often, traders rely on tips and ideas from the broking
fraternity for trading. That does not work in the case of intraday trading. You
need to learn how to interpret charts and news flow yourself. There is no rocket
science in reading charts and you can do that with a little bit of extra
effort. Trading intraday is extremely personalized and off-the-shelf solutions
are bound to disappoint.
5.
Trying to
outsmart the market is a cardinal blunder that a lot of intraday traders
commit. As an intraday trader, you are different from a long term investor. A
long term investor with a Buffettian tilt can afford to take contrarian calls
on the market. As an intraday trader, you are trading within the limited window
of 6 hours. The best way is to read the market trend and play by the trend.
Trend is your friend as an intraday trader. In the long run, the market will
always outsmart you!
6.
Not
adapting to the changing environment is a common reason why intraday trades
fail. We call it the giraffe syndrome to represent the way its neck adapted to
vanishing grasslands. Market undertones keep shifting continuously. Volatility
could increase, midcaps could become more attractive, sectors could go out of
favour and all these have an impact on your intraday trading strategy. It
depends on how best you adapt!
