TRADING GUIDELINES
Remember: You only make money if someone else loses it. If you are not fully committed you will lose money, and someone else will take it away!
Trading is a serious business. You will need (1) a good trading method and (2) good money management policies. You will also need four important weapons: Confidence, Discipline, Focus and Patience. I will explain these requirements in detail.
Objectives
But, before that, lets get some basics right. As an intraday trader, what are your objectives for the day? To make profits. As much as possible. Whether the market is going up or down. Bull or Bear, you want your daily profits.
Very Good. Now, let us look a little more closely. In real terms, right at the beginning, you should be doing these:
Start with a fixed investment. How much? An amount you are ready to lose in the stock market. If you suddenly lose the whole of this amount, your normal life-style should not be disrupted.
This amount can be as low as Rs. 15,000/- to begin with. The higher the better. But, anything below 10K is not worth it. For this discussion, we will assume you have started with an investment of 15K.
This means, with the 4-times margins that on-line brokers allow, you can buy stocks worth Rs. 60,000/- for intraday trading.
Now, if you had taken this 15K on interest from the open (unsecured) market, you would be paying about 5%-7% interest per month. That is, 700-1000 per month. In the stock market, you have to earn at least 5 times that amount: 3500-5000 per month. So, set yourself a target: You have to earn Rs. 300/- per day. With an average of 20 working days per month, this means 6000. There is a little margin here to take care of the 'rainy' day.
200 is the daily figure. You should now forget about your monthly targets. Simply concentrate on your daily 300.
Suppose you have been suggested a scrip whose price is around 600 each. Total purchase price cannot exceed 60K. So, you buy 100 shares.
Here I've made a very important statement: once your budget is fixed, you will not get disturbed by the price of the share you are trading today. If price is around 600 each, you buy 100 shares, so that total purchase price does not exceed 60K. If the price is 1000 each you buy 60. If the price is 70 each, you buy 800 shares.
The example given here is on going LONG. Same points that are made here also apply if you are going SHORT. If the market is going up, look to go LONG. If the market is falling, look for SHORTING opportunities.
Once the number of shares has been fixed, you will need to calculate how many points increase or decrease will be required to meet your target. On a LONG example, if you've taken 60 of 1000 each you will need an increase of 6 each to meet your daily requirement (60 x 6 = 360). The extra is to take care of brokerage, etc.
In this example, you've taken a position on 100 shares. Since your daily target is a profit of 300, you should be looking to sell and square up this trade when price reaches 603 (3 x 100 = 300).
Similarly, if you look to buy a scrip worth 95 each, buy 600 shares and look for a profit of about 0.50p per share. (600 x 0.5 = 300)
If you can make more than the required 300 from your first trade of the day, very good and well played! But do not get carried away. Most importantly, never ever risk away today's income. You MUST take home today's 300 first.
Do not try to insulate yourself in advance for a possible bad day tomorrow. Tomorrow will be a new day, with new possibilities, which may be even better than today. We'll see about all that tomorrow. Today you take your 300 and go home.
You might get another opportunity with another stock later in the same day. What is to be done in this situation? Depends on your situation at that point of time, with respect to your total earning in the earlier part of the day.
Never look at your monthly figure. Only consider today's position. If you have made 400 earlier, you can take a risk with the extra 100 you've earned. Or, if you have only made 100 in the first trade, look to make another 200 with this opportunity.
But, if you have actually made that 400 in the first trade today, it is strongly advised that you call it quits. Keep the extra profit. Don't let someone else take away this money. Take the rest of the day off. Enjoy!
If your investment is different from the 15K in this example, all the calculated figures will change proportionately. Examples are given for taking LONG positions. Same will apply in the opposite direction when you go SHORT, daily target remaining the same.
Just consider this: on an investment of 15K, you stand to make 4K per month. You double your money in less than 4 months. And it looks pretty easy! Increase of 3 for a stock of 600 value is not a big deal at all. A rise of 0.50p for a stock with value of 95 each is also commonplace. Even in the worst of days. So, where is the catch? Why do people lose money at the stock market? The catch is not in the WHY?, or the HOW?, but in the WHERE? There is also a WHEN?
Where?
Finding the right stock that will rise from 600 to 603, or from 97 to 97.50 on that particular day is the challenge. Finding that one amongst the 1000+ available at NSE is where most people falter. People put their money at the wrong places only to see losses.
Here you can look for stocks which are in medium-term uptrend. If the stock is in uptrend / down-trend in medium-term, then it is better to do intra-day in such stocks. Brokerage House reports gives you stocks with medium-term trend. If the medium-term trend is strong, GO LONG or if medium-term trend is weak, GO SHORT for intra-day.
When?
Like I've said at the beginning, Intraday Trading is a serious business. And after you know which stock to invest in, this 'When?' is a vital point in that serious business. This mainly deals with your entry and exit points.
As mentioned earlier, to control these points you will need (1) a good trading method and (2) good money management policies. You will also need four important weapons: Confidence, Discipline, Focus and Patience.
TRADING METHODS
Every trade you put on, you should be prepared to lose. So, make sure to place your stop-loss order. Otherwise, what would have been a small loss turns into a big loss, throwing the entire risk/reward ratio out of gear against you.
Where should the stop be placed? The simple answer is: where you think you can absorb the loss. Suppose you go long and buy 50 of Kirloskar Brothers @ 325, with your 15K budget, and you are mentally prepared to take a loss of 300 at this time of the day, so keep your stop loss for Kirloskar Brothers at 319. Back calculate to arrive at a figure you are comfortable with. Remember: the loss, if it happens, will be going away from your 15K capital.
If the market goes in your favor once you have taken position and the stop-loss is in place, then you need a set of rules that will allow you to exit the market profitably.
This poses a real dilemma. If you exit too soon, you will secure a small profit, but miss out on all those big moves that occur (and the big profits that go with them). On the other hand, if you wait too long to exit, the market may reverse and take away all of your open profits and even put you into a loss position.
Because of this, you will absolutely need an exit strategy that is effective: forward calculate and decide on a profit margin as explained earlier. Be realistic. Do not be influenced by emotions like hope, fear, doubt and greed. For this trade, with respect to your profit calculation, set yourself an initial target: you will exit Kirloskar Brothers as soon as it reaches 380.
Setting these two targets -- STOPLOSS: sell if the price goes down to 'x' and EXIT: sell if the price rises to 'y' is good trading method.
What this 'x' and the 'y' should be, will also be infuenced by various things: strength of the scrip, overall market condition, time of the day, your risk-taking apetite and how deep your pockets are.
Money Management
Setting yourself reasonable targets is no good if you do not stick to them. This is where stiff money management comes in.
If after taking a position on Kirloskar Brothers you see the price sliding down and down, get out! Get out as soon as the price goes down to 'x'. Don't wait around for it to come back in your favor because the odds are against it.
If on the other hand, you see the price moving up, do not do anything till it reaches your target of 'y'. At this point, you have to take a "Mid-Point Stand" on whether to sell at 'y' or hold on, keeping in mind that if things turn bad, profit already earned will turn into loss.
Mid-Point Stand
For all stages of both bull and bear markets, you should take a "Mid-Point Stand" when things are going in your favour. When they are not -- simply get out at your stoploss and look elsewhere.
Here you need to know the overall context in which your buy/sell signals are being generated. Taking a mid-point stand requires that you pay more than a little attention to non-technical indicators, to make it possible to take a long enough look ahead to make your view a sound one.
For example, on the day the Manmohan Singh govt. won its trust vote in Parliament in Aug'08 all stocks were going up and up even before the official verdict was out. On a day like that it will be foolish to sell at 'y' if your timings were right.
A trust vote does not take place everyday, so there will be very few occasions like this where you can take a mid-point stand with certainty.
However, there will be times in the stock market when prices changes in big chunks, very rapidly. If you happen to be in the middle of such a rally, and you've been able to spot it correctly, you can take a mid-point stand. In all other cases, you simply must exit at 'y' and be happy and content with your profit.
This is sound money management. Without following sound money management principles, there is no chance of success in intraday trading the markets.
Staying out
On certain days all stocks will look out of shape. Nothing is happening. Everything is range-bound and moving sideways. Rises are small, insignificant and cannot sustain. This is a day to avoid. Stay out. Do not take a position on any scrip on that day. No place for hope, fear, doubt or greed.
The act of staying out is just as much a positive action as buying or selling, and, in fact, requires more courage at times.
Zerodha (Trading & Demat Account)
RHP
