Day trading has a lure of its own.
The quick profits and the no worries about the overnight exposure of the trade coupled with small margin requirement are the reasons that attract the multitude of traders to day trading.
But things can go terribly wrong.
The dreams of quick profits can turn into nightmarish losses within the same trading day.
To avoid such situations, one has to work with a set of rules.
These rules will keep you grounded, protect you from huge losses and will ultimately reward you for disciplined trades by way of profits.
Ignore them and you are into gambling territory.
Rule 1:
Do not trade without a stop loss.
Any trade can go wrong. We expect to make a profit but care is to be taken to manage the loss. A big loss can have psychological impact on other trades also besides depleting the capital.
A sensible stop loss should always be there to protect you.
Example:
Please see the Tata Motors Futures trade dated 12–09–2017 ( yesterday):
I had done short selling at Rs. 379.15 with a stop loss fixed at Rs. 382.
When the stock made an upward move, the stop loss got triggered. A loss hurts but it would have hurt very seriously if the stop loss was not there.
Tata Motors futures went above Rs. 390 at one point and closed the day at Rs. 389.05.
The loss could have been 5–6 times the present loss.
Stop Loss is a saver. Never trade without it.
Rule 2:
Trade with comfortable position size.
There are times when a trader is very sure of the direction of the trade. It looks like a certain profit.
At such time there is a tendency to go for a bigger trade.
Do not do it.
Trading is all about keeping your losses manageable. Leave the profits to the market.
If you are comfortable trading 1 Lot, keep trading that.
Go for bigger position when the financial cushioning for bigger loss is available and not when you feel like it.
Doubling the position size in the above Tata Motors trade would have resulted in more grief even though I was really expecting profits from this trade.
Rule 3:
Leave the Profits to the market.
We have fixed the loss limit by Rule 1.
Now is the time to talk about taking profits.
Remember, these are day trades. You are going to exit a few minutes before the close of market either with profit or with a loss.
Do not book profits with pre determined targets.
It may not make sense to most of us but one must try to maximize the gains even in day trades. You never know where a stock is likely to go.
You booked a profit at 1% and the stock goes up 5% in a day.
Is it not a golden opportunity missed?
Have patience in the trades that go right.
Keep the stop loss trailing and wait for the profits to come to you.
I shall quote one of my oft repeated trade to emphasize the importance of this point:
The trades are from July 08, 2014.
BHEL futures ( Lot Size 2000) were shorted at Rs. 264.50. After it moved down a bit, the stop loss was moved down to Rs. 265.60.
Soon the stop loss was hit and the first trade ended in a loss.
Sold it again after some time for Rs. 266.40.
It went right this time.
Fell to 260, then 255, 250 and still lower.
There was temptation all the time to book a profit but I kept waiting and kept changing the stop loss.
Finally was stopped out at Rs. 244.30, netting a profit of about Rs. 44000 in this trade.
Had I exited earlier at 260, 255 or even 250, I would have made a decent profit but would not have known what was possible.
The rule ultimately becomes:
Limit your losses, not your profits.
Conclusions:
These three rules have served me well so there is no point in adding many more. Keep the trading simple.
Have faith in your trading plan,
Have a strong belief that money can be made from day trading.
Do not trade when under stress whether financial or emotional.