12/25/2010 06:16:00 PM

GOLDEN RULES
Almost everyone finds intra-day (margin) trading fascinating. Most young and first-time day-traders feel all they need to do in this cakewalk is to have a dematerialized account.Invest some money at the start of the day and take home a quick gain of 5-10 per cent each day.
For the uninitiated intra-day trading refers to dabbling in shares on a daily basis as against investing wherein you buy a share today and plan to sell it a few years or months down the line.
An intra-day trader has to deposit an amount with her/his broker that is known as margin money. Based on this margin money your broker will give you a trading limit that is generally a simple multiple of the amount you deposit.
For instance, if you deposit Rs 20,000 with your broker then he can allow you to buy or sell shares worth Rs 80,000 (Rs 20,000 multiplied by 4) on a particular day. At the end of the day you have to sell whatever stocks you have bought irrespective of profit or loss. This, in market parlance, is called as squaring off a trade.
Similarly, if you sell a stock first at a higher price and if you buy the same number of stock at a lower price on the same day then this is also termed as squaring off a trade. In both the above examples you are making a profit.
But things are not all that rosy as they seem to be. You may buy a stock at a higher price and the stock price of that stock may fall after that. Before the market closes at 3.30 pm everyday you will have to sell that stock to square off your trade. That is the most important rule of day trading. If you sell it at a price lower than your purchase price then you make a loss. Similarly, if you sell a stock at a higher price and purchase that stock again on the same day for a price higher than what you bought for, you again make a loss.
So day-trading is a double-edged sword which if not handled with care can hurt young and first-time day traders. Hence, in depth knowledge and a lot of insight is needed for intra-day trading. In fact for a novice, intra day trading can turn out to be a dangerous affair.
Does that mean you should completely avoid Intra day trading?
Well the answer is NO. However, one needs to be careful while trading and keep several things in mind before you jump into the choppy sea of intra-day (margin) trading. While hundreds of books have been written on tricks of intra-day trading here are 10 thumb rules that you must remember before you start trading intra day.
1. Never rush into a trade. Always reach the market at least 15-20 minutes in advance with your trading list in place.
2. Trade with a calm mind, maintain a sound balance between personal life and life in the share market; don't let the two aspects interfere.
3. Don't enter a trade if you are unsure of the trend (if prices will move up or down). Preferably start trading around 10.10 am (markets begin at 9.55 am every weekday; weekends are a holiday) to know the clear market direction.
4. Never risk more than 10 per cent of your trading capital in a single trade.
5. Over trading kills, never do over trading.
6. Remember that no one can predict the exact highs and exact lows. So never try to catch them.
7. Always maintain strict discipline in your trades. Remember to keep a strict stop loss and booking profits is a must (So that you know how much you can afford to lose).
8. Booking profits is very important and booking loss at the right time is even more important.
9. Never let a profit turn into a loss; always keep booking profits and raise your stop loss accordingly.
10. When in doubt the best thing to do is 'Get Out', and don't 'Get In' when in doubt. Simply put, when in doubt prefer staying at home and enjoy the company of your loved ones.
· If index is in positive from yesterday and the share you are holding is in minus then it should be cut and if intraday trend of index is in buy then one should buy a stock in which is in plus.
· If index is in minus then one should look to short stocks which are minus and not stocks which are in plus.
· It is not necessary that a stock which is weak today during intraday trading might be weak tomorrow also, simultaneously if a stock is strong today might not be strong tomorrow
· If US Markets have gone up overnight, the markets here in all probability will open strong, so one should be quite careful when buying stocks as the general psychology of public is to buy when good news is there.
· Being a contrarians is very important while trading intraday.
· Stop loss is a must while trading intraday.
· Always trade in very liquid stocks i.e. which have very high volume because as entry and exit can be very fast in such stocks.
· Do paper trading before you actually start trading so that when you start making paper profits, then shift to actual trading.
· Keep your volume constant e.g.: if you trade in five lots of nifty future then trade in five lots only. This position can be increased only when you are satisfied with your trading for a month. It should not be that one day you buy five lots and next day you trade in ten lots and third day you get a loss and stop trading for two days.
· Fear and Greed are at maximum levels while trading intraday so always have less position when you are new to intraday trading as otherwise you will be mostly under tension.
1. They forget to look at bigger picture and adjust style as markets adjust. Some traders think using the same investment approach for trending markets and range-bound markets is being “consistent.” But in range-bound markets, you have to be more mindful of when things are at the top of that range or falling towards the bottom.
2. Overcomplicate things rather than just keeping it simple. In short, dummy it up a bit. Accept the fact that trading is really a game of up, down, and sideways and you can inprove your trading profits.
3. Fear of missing out on that home-run trade. Trading is really about making small money on a lot of trades rather than hitting that $1 million trade. All traders miss out on a great trade somewhere in the world. In fact, the home run trade could actually turn out to be a whiff. Remember, sometimes the best trade is the one you don't make.
4. Think “I have to be right on a lot of trades to make money.” Wrong! Some of the best traders in the world have winning percentages lower than 50 percent. Success in trading really is about how much you make when you're right, and how much you lose when you're wrong. Keep that spread wide, and you're on your way to success.
5. Believe they have to trade without emotions. First of all, it's impossible because all humans have emotions. What you need to do is learn how to control or compartmentalize them so they don’t end up making decisions for you. Keep your emotions in a bottle and you're on your way to success.
6. If I lose money, I stink. Sometimes, you make money on bad trades and lose money on good trades. More important is the caliber of your trades. Do they have edge? Are they high-caliber trades? Judge your success based on that information, rather than your Profit&Loss
7. They take losses “personal.” The market is not out to get you or anyone else. We're just operating within its context. If you treat it like a business, you're much more likely to have success in range-bound markets.