Skip to main content

Rules to follow for Day Trading


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.

To open an account and start investing, visit Zerodha.

Popular posts from this blog

When Sir Isaac Newton Lost Millions in Stock Markets!

Isaac Newton was one of the smartest people to ever live. But being a smart physicist is not necessarily the same thing as being a smart investor. And, unfortunately for him, Newton learned that the hard way. In an updated and annotated text of Benjamin Graham’s classic “The Intelligent Investor,” WSJ’s Jason Zweig included an anecdote about Newton’s adventures investing the South Sea Company: Advertentie “Back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he ‘could calculate the motions of the heavenly bodies, but not the madness of the people.’ Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price – and lost £20,000 (or more than $3 million in [2002-2003’s] money. For the rest of his life, ...
Read more

Understanding Credit Default Swaps!

In just over a decade, the credit default swap (CDS) emerged on the scene, grew exponentially, found fame and fortune, and then crashed to the depths of public opinion — to the point that it is today blamed for the current financial crisis. The tarnished CDS is even accused as “the monster that ate Wall Street”. It was created to cover asset losses if a default happened, similar to taking out home insurance to protect against losses from fire and theft. Except that it did not. The CDS was traded from investor to investor with no oversight, ensuring that the “insurer” had the ability to cover the losses if the asset defaulted. However, recently, the Malaysian Rating Corp Bhd indicated that CDS should be introduced in the local financial market to spur bond trading. With the CDS being in an infant stage in Malaysia, this could be a sound move, as we may be able to avoid the pitfalls encountered by the early adopters and trade it as an enhanced and rehabilitated product. In doing s...
Read more

Understanding The Market Cycles!

Even though most of us know that the stock market follows cycles, there is still a lot of mystery why one is unable to spot it. It is important that one has to understand this market dynamics to be able to benefit from it. The length of each cycle is different- Every market cycle is of a different length. Sometimes the cycle could last only for a year and other times for decades. Valuations are not constant- Valuation or the price to earnings ratio keeps changing and they differ from one cycle to other. So what may be expensive in this cycle may not be expensive in the next. There is thus no set value when you know that if say the P/E is 50 then the market is overvalued or when P/E is 10 then the market is undervalued There could be one cycle within another- The stock market cycle is defined in a set But it can happen that there is a cycle within a cycle. The individual sectors could have their own cycles and small cycles would affect different stocks etc. These actually ge...
Read more