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One fine trading day

With a bit of caution, and loads of gumption, day trading can give decent returns— but it’s not for the faint-hearted.

Tejeesh N.S. Behl | Print Edition: March 23, 2008

They are two opposite ends of the age spectrum, but 24-yearold Adarsh Gupta and 60-year-old Subhash Manchanda have something in common: they get a kick out of day trading.

Gupta, in fact, may qualify as an old hand in the stock market game, given his eight years experience of dancing with both bulls and bears.

But what also sets this Associate Vice President with Copal Partners—a Delhi-based KPO—apart is his day-trading strategy. “I’m a long-term investor as well, but for day trades, I choose only large-cap stocks,” he reveals. The reason? “Large caps tend to give you larger returns on your investment— though they also skin you pretty bad on the downslide,” he admits.

All in a Day’s Work

There are plenty of tricks under a day trader’s hat. Here are some of them.

  • Buy shares at or below opening price. If the share price has risen too high, wait for correction
  • Always check out buying and selling volumes. If buying volume increases, price will go up and vice versa
  • Check derivatives status. If derivatives of a stock as well as volumes are rising, go ahead and buy it
  • Maintain a strategy of setting target price. If your purchase hits its target price, book your profits, as the target price could turn out to be its resistance level from which the price can reverse again
  • Maintain stop-loss.when a share price falls, always have a stop-loss price line to prevent huge losses
  • Multiple trades, small profit. never hold a single stock too long in the hope of huge gains. Book profits early and invest in other stocks; small profits from several stocks mean big profits at the end of the day 

It’s a view Manchanda, who opted for voluntary retirement from Kodak and turned day trader, agrees with. “Large- and mid-cap stocks usually have high liquidity, which, at times, is not the case with small caps.”

There is, however, one difference between the two day traders—while Gupta vehemently advises retail investors not to pitch into the highvoltage life of day trading, Manchanda feels that this depends on the risk appetite of the trader.

But, so far, the good news is that both are still playing the game and pocketing tidy sums.

While Gupta, who’s cagey about disclosing the amount he invests, rakes in a 30-40 per cent return on a monthly basis, Manchanda doesn’t do too bad either, raking in around Rs 1.5-2 lakh a month.

High Stakes

But for the few success stories, there are many not-so-lucky ones in day trading.

As it comes with a higher risk quotient than, say, short- or long-term investing, one needs to constantly monitor price movements and market behaviour.

Veteran day traders also add another caveat—panic is a day trader’s worst enemy.

Panic selling or impulsive buying without coolly analysing the reasons for the stock’s gain or loss will only add to your losses. “As it is, 90 per cent of day traders end up losing money.

Panic selling will only compound the problem,” says C.J. George, Managing Director, Geojit Financial Services, who refuses to believe that day traders can make money over the long term.

Trade Another Day?

Before you dabble in day trading, know its pros and cons.

PROS

  • One does not have to take the delivery of shares as trades are settled the same day
  • Lower brokerage charges compared to delivery trading
  • Short-selling allowed in day trading but not in delivery trading

Cons

  • While chances of gain increase with margin trading, so do the risks
  • You have to square off all your open positions by end of trade and the share price may not be in your favour
  • If share price falls too low, you may be forced to take delivery to prevent immediate losses 

What a day trader needs to keep in mind is that he must settle his outstanding trades on the same day, come what may. The focus, therefore, has to be on speedy decisionmaking. “Day traders need to keep in mind four rules while investing: never take over-exposures, keep a strict stop-loss, don’t trade against the trend and clearly specify your risk-reward ratio,” informs Vinay Agrawal, Executive Director (Equities Broking), Angel Broking, adding that a day trader should not have more than two or three open positions.

In addition, a day trader needs to keep himself abreast of not just stock developments but also industry developments, especially government announcements on a specific sector as they have a huge bearing on share prices.

“The trick to be a successful day trader is to put in place a stop-loss price and limit your losses,” advises George. “The smart day traders,” he continues, “don’t keep hanging to a falling stock but, instead, exit from it early and invest in another.” Both Gupta and Manchanda admit to have suffered losses in day-trading outings.

But the losses, says Manchanda, are notional, and as a back-up, he sometimes takes delivery of shares and holds them till prices move back again to the desired level.

Day trading doesn’t find favour with the financial planners, who dub it as punting. “Day trading is for short-term speculative gains and the overall incremental impact it has on wealth is minimal. At best, you can indulge in it as a hobby, setting aside a kitty for your day- trade investments—keeping in mind that your wealth should not get impacted,” says Rohit Sarin, Founding Partner, Client Associates. “Day trading,” he adds, “is active wealth management, whereas financial planning takes a long-term view.” As markets plod on rough paths, the trends don’t favour the day trader— it’s time to rein in your horses.

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