There are many ways you can make money from the stock markets. Most people are aware of the investing part - you buy stocks of companies and hold them for a longer period to make use of their potential growth. Here, the idea is that the price of a stock will continue to grow as long as its fundamentals are in place. The growth of Sensex and Nifty could be considered proof of the same - both indexes have grown over 65% in the last five years, as of June-end, 2022.
But that is not the only way to earn profits from the stock markets. Day trading is something that is becoming popular these days. Read on to find out all you need to know about day trading.
To understand what day trading is, you must first understand the difference between trading and investing. Investing is a long-term approach to the stock markets. Here, you are aiming to make a profit from the long-term growth of a particular market, and you are least concerned about short-term dips.
On the other hand, trading tries to make use of the short-term fluctuations of a stock market. Here, short-term could mean anywhere from just a few seconds to a few days between a buy and a sell. In the case of day trading, it is a day. Hence, day traders close a position that they open by the end of the day before market close. (Here, open a position means to buy a stock, and close a position means to sell a stock).
Day traders look to take maximum advantage of the short-term fluctuations of a stock market. Hence, the traders need to keep a keen eye and be extremely active to act quickly. The key here is volatility. If there is no volatility, there is no chance for traders to make money. On the other hand, the more the volatility, the more chance for you to make a profit or loss.
For instance, suppose you buy a stock for Rs.100 at 10 am. If the stock price stays there and thereabouts till the end of the day, then there is no chance for a day trader to make a profit. But instead, if the stock price starts to swing and reaches Rs.110, then the trader would try to sell and pocket a profit. But the trader must be extremely fast here because the top price may remain only for a matter of seconds.
When the stock markets move that much, there needs to be enough focus on risk management as well. This will help them be cautious and limit the loss they make.
There are three main risks that you should be careful of when you are day trading.
The first and most important risk is the most obvious one as well - volatility. Stock markets can give you capital growth in a matter of seconds, but at the same time, they can wipe your money at the same speed as well. Hence, you need to be extremely careful of the volatility risk. Now, you can’t trade in a low-volatility environment as it may result in a no or low-profit situation. Hence, the aim here is not to avoid volatility but to learn to manage it.
The first and foremost thing you can do is try and predict the market movements. Just like how fundamental analysis will help you see if a stock price has a growth opportunity in the longer future, technical analysis may help you predict stock market movements during day trade.
The idea here is simple - technical analysts believe that stock market prices tend to follow a pattern. And if we study history and find a similar pattern in the current day, a similar price movement may happen.
For example, if stock X had moved up after a particular stock price trend in the past, the stock price may behave similarly if the pattern is to be repeated. Hence, when such a stock price pattern appears, you could buy the stock to make the best out of it.
Liquidity describes the ease with which a stock can be sold in the stock market. As discussed above, you will need to close the position by the end of the day in day trading. For that to happen, there needs to be adequate liquidity. Less liquidity could mean that you may find it difficult to sell, or you might be forced to sell at a discounted price.
As said above, adequate liquidity is necessary for you to close the position successfully before market-close. But what affects liquidity? Liquidity is mainly affected by the volume of trades. As we know, stock prices are determined through supply and demand. Higher demand or supply ensures higher volume. In simple terms, there is higher volume when more people are trying to sell or buy a stock, and when there is a higher number of trades, the liquidity is also high.
Day traders spend most of their time at the market researching opportunities where they can enter and exit the market for investments. This is where the experience, research, and time spent in the market come into handy.
There are two important points that a trader looks to pinpoint - entry and exit points.
An entry point when where the trader enters a trader, and an exit point is where the trader exits the trade. If the trader is trying to buy and sell a share at a profit, then the entry point is when the trader buys the share, and the exit point is when the trader sells the share.
You could employ several strategies here, including the above-said technical analysis. A trader's success in the stock market depends on choosing the right entry and exit points. But day trading is not limited to buying and selling shares at a profit, and you could earn from a stock price going down as well. Here, you would enter into a short position if you can predict a stock’s price going down. Now, a short trade is a complex topic, but basically, you can bet on the stock price to go down.
There are three major methods of day trading.
Traders believe that the price of a stock will stay between a level of support and resistance. But if a technical analysis tool signals a breakout of this level, traders can make the best out of it by buying or shorting.
Most of the time, stocks tend to go up, and most traders look for opportunities in the same. But share market is volatile, and there could be negative movements as well. Pullback trading is when traders try to use this. As said above, shorting is something traders can consider here.
Stocks go through minor price fluctuations every second. You could hold on to a position anytime till the end of the day to make the most out of the trend, or you could exit after a smaller price change to quickly grab the profit. The latter is called scalping. Here, the traders would sell off their position in a matter of seconds. The trade volume can be higher here to make profit a considerable amount.
This strategy is similar to breakout trading. Here, instead of waiting for a stock price to cross the range, traders use the price movements near the ranges to make a profit.
Fundamental analysis can be used to predict the stock market too. News is one of the strongest stimuli here. Positive news, like good quarterly results, could help the stock price go up and vice versa. But the best course of action here is to club the fundamental analysis with technical analysis as well for best results.
This is where computers play a part in trading. These systems use computer algorithms to do high-volume trading, looking at different indicators like price, volume, technical indicators, etc.
There are certain things you need to do before you start day trading. This includes both technical and fundamental aspects. Let us look at what they are.
You need a trading and demat account before you start trading. A demat account is where the stocks you buy will be kept, and the trading account provides you with a platform to trade. Hence, you need to get both of these ready before you start trading.
The process here is simple, though. You can get both accounts from any stockbroker in India if you have sufficient identity and related proof.
Different studies show that only a small percentage of Indians who take up day trading end being successful. This may be because a lot of people enter the market without sufficient preparation. What differentiates stock markets from a mere lottery is this preparation. Instead of relying on just luck, successful traders use research to try and predict the stock market movements and trade accordingly. Hence, it is very important to market thoroughly before investing.
Trading without a goal or a strategy is like boarding a random train, hoping you will reach a desirable location. In fact, what drives your strategy should be a solid goal.
For instance, let us suppose on one particular day your goal would be to make the best out of stocks from a particular sector as there is a favourable Government announcement. You will study the stocks and use technical and fundamental analysis to find a suitable time when you can enter the markets. There could be different suitable times for different stocks here. But your goal here is set. Now, you will work on the strategy. You will use research to formulate one here. But for the sake of this example, let us say your technical analysis said that entering the trade at a particular level could be profitable. That will become your strategy.
Unfortunately, the only way you can befriend trading is by trading itself. But trading like that could cost you money.
But fortunately, a lot of brokers provide demo accounts. These will have virtual money with which you can trade virtually to see if trading works for you. The stock prices and the rest of the data is real and live; only the money is virtual, so you can get a real-life trading experience here.
It is through a stockbroker that you will be able t access stock markets. How the broker functions may break or make your trading experience. Hence, it is imperative to choose a trustworthy stockbroker. Here too, what works for you need not work for someone else. Hence, it is important to compare the brokerage services of multiple brokers before you decide on one. Factors like brokerage fees, functionalities of the trading account, etc., can be used for this gauge.
Beginners need to be extremely cautious when they start to day trade. Below are a few strategies you can use.
For many, trading is a full-time job. It is because the same demands such an amount of time to research and employ your strategies.
Hence, it is wise for you to set aside a considerable amount of time to trade, especially as a beginner.
Your risk of losing money is higher when you are a beginner. Thus, make sure you start with a smaller amount of money and scale up as you go.
Stop-loss is a function that triggers the auto-sale of the stock when its price reaches a certain level. Make use of the same to limit your loss.
Day trading is a proven method of stock market trading, but the key to success is often the amount of work you are willing to put in. Hence, make sure you do proper research and analytics before you start to trade.
The choice of a good broker is highly subjective. What works for one person may not work for someone else. The best thing to do here is to compare the features of different accounts and choose one that works for you.
There is no magic number here. You can start with a small amount, but the number of trades you can do is limited if your budget is small.
No. Day trading is a legal way of making profits in the stock market.
Open a Demat account with us and start your investment journey today!