6 Common Mistakes to Avoid in Intraday Trading

This article is all about mistakes in intraday trading. In this article, you can learn intraday trading secrets from the viewpoint of changes that you should bring in your style of trading.

This article is all about mistakes in Intraday trading. In this article, you can learn Intraday trading secrets from the viewpoint of changes that you should bring in your style of trading.

This article not only states the errors that we commit in day trading, but also advises on how to avoid them.

6 Common Mistakes to Avoid in Intraday Trading, stock trading Mistakes to Avoid in Intraday Trading, share trading, trading mistakes, stock broker, share broker, best trading style,

 (1). The first mistake to avoid in Intraday trading is to avoid trading within 5 minutes of logging in your trading account.

What happens is that you are eager to trade when you log in. To suit yourself, you scan through short term price action of your favorite stock. If you do not get a suitable entry point in that chart, you scan through even smaller time frames.

Even then your brain alerts you on entering at a wrong price level.So you start searching for entry points in other stocks.

Finally, you find the price of a stock at 5 minutes high or low. And you jump the gun i.e. you acquire or sell the script.

But then the price keeps going lower or higher.

So, what was wrong, you would ask. After all, you entered the trade at 5 mins high or low.
The mistake that you made in this case, would have been evident to you, had checked the charts with a longer time horizon, patiently. Instead, you went on for the shortcut, the shorter time frames.

In such cases, you will find that although you your positions are at intraday low or high, they may at opposite positions, chartwise, when you view them at 6 months or one year perspective.
What seemed as a intraday low and a buying opportunity, was actually a top in when viewed from 6 months horizon. No wonder the price kept on sliding, after you bought the script.

(2). Over- trade/Excessive trade

You take a position not by it's own merit but because you were bored to death for the last fourty-five minutes, looking expectantly at the screen but doing nothing. So, you bought shares worth ten to fifteen thousand to basically entertain yourself, knowing that the buying price was not right.

Excuse me, but is this the same person who spent thirty minutes that very morning, haggling with vendors for a rupees five cut, while buying vegetables?

Next, we come to one of most common trading mistakes.

(3). One of the pitfalls of Intraday trading is over-involvement in trading.

This occurs when repeat the same trade, without any profitable result, at almost the same price. In this type of trade, the only benefactor is the broker. He makes profit out of your trading volume. The reward you get in this case is the increase in your acquisition price and hence lesser profit when you liquidate.

How do you get  over-involved  and what happens due to it?

Let's say you buy a script. Instead of letting it go and relaxing you start following the price thereafter all the time.

Obviously, the price would not move in a linear fashion, upwards. The price zig zags and comes below your buying price. You think you were wrong in taking position at that price. You square off the position, sometimes at par, other times at a loss  Now you wait patiently for price to come down below your previous acquisition price.

Alas, it does not happen. Price thereafter never comes back to that lower level that you had envisaged.

Now realizing your mistake, you again buy back those same quantity. In all probability, this time the buying price will be slightly higher than the last time. So, you bought the same quantity at almost same price two times, but will be able to sell it once. That translates to twice the brokerage and other charges during buy. You net acquisition cost increases.

Who benefited from this action? Obviously the broker, who is all smiles with this additional volume and brokerage.

Why did this happen. All because you stuck to the screen following the price movement every minute.

After taking position in a planned and confident manner and knowing the levels at which you are going to sell it off, do not let your greed liquidate that position for better levels. Stick to the trade you have done with a plan in place.

(4). Shifting of Targets is another cause of loss in Intraday trading.

When you transact, you normally have a plan as to the price at which you will liquidate your position, with profit. This is known as the target price.

Sometimes it so happens, your dream comes true too fast. The price reaches your target soon and smashes through it. Everybody covinces you that the price will rise further.

Remember crude oil reaching almost 150 dollars!

Thereafter, your mental target shifts to a higher level than actually planned. You do not square off, even at profit as previously envisaged.

Incredulously, the price suddenly crashes, and leave alone the target price, it slides below your acquisition price.

Remember, crude thereafter crashing to 35 dollars per barrel.

So, from a position of profit, you suddenly look at a pile of loss, all because you did not sell at the pre-target price, instead setting the bar higher.

Morale is, when at profit, take it off the table, at least partially. Do not salivate for more.

In the rules to follow for intraday trading, one law sticks out from the rest.

(5). Do not over-leverage.

More than cash market, this becomes more important in derivatives. Even legend like Warren Buffet admits that derivatives is a sure shot way for destruction of wealth.

In future, you can buy one lot ( quantity running to hundreds in one lot of that script in futures ) of a derivative script with only 5-7 % of the total money, as upfront payment from your taking account.

Say, you have a total amount of fifteen thousand in your account. You buy a lot of any script which costs about r(margin money) rupees eight thousand. That means eight thousand is debited from your account at the time of buying that script in future.

However, if the price of that script moves adversely, soon you will face the prospect of about one-two thousand rupees getting debited pretty soon as MTM or market to market loss. This happens because the profit or loss is calculated on the whole lot, which again runs into not one but maybe hundreds of more quantity of that item.

This effectively means that, if one item of the lot rises by one rupee, and the lot is composed of 500 shares of that item, one lot of that item will rise by 500 rupees.

Imagine the situation, when you have short sold a futures, thinking you will but it at lower levels, but instead moves up by 10 rupees. That's Rs 10 * 500 (for one lot), a loss of 5000 rupees.

And if the situation or your luck gets particularly bad, it can occur in the same day or worries an hour.

You panic. Naturally, with eight thousand blocked as margin for buying/ selling a lot, only seven thousand of free cash remains in your account, and a particularly heavy adverse movement and consequent loss is all that's required to bring your trading account networth to zero.

Fearing uncertain future, and inability to put in more capital, you liquidate your futures position at a heavy loss intraday. Your account networth becomes half of what it was at the start.

To avoid this predicament, do not take over leveraged positions, especially when your total balance is bare minimum with reference to the positions you take. Your broker gives this facility to induce you to trade in futures. He will not help you when your account balance slides towards the black hole.

(6). Have a benchmark and plan ready before you take a position.

Think of it. In absence of any benchmark or target, how will you decide when to take profit off the table? Or how to trade if the situation gets better or worse? What will be your line of action if the price rises steadily once you buy?

After all, you are an intraday trader and not an investor, who keeps the shares irrespective of it's rise or fall in a short time span.

The above points are counted among the main pitfalls of day trading. Few points remain to be discussed, which will be done in the next part of this article.