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.
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.
Conclusion
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.
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