How to day trade ?
Hello folks, welcome to CCB. In this post I’ll teach you how to day trade.
The first question that arises when it comes to day trading is, how to pick stocks ? The procedure you need to follow to pick a stock is,
◦ Pick an evergreen stock and that particular stock must be in an uptrend. Now you may be wondering what uptrend is aren’t you ?, don’t worry, in simple words uptrend means the price of the stock must be rising. If you plot a graph where the price is on Y axis and time on X axis, the stock must move along 45 degree angle, plus or minus few degrees. The reason why this should be done is, if you don’t book profits on the same day that you invest, then you must be in a position to book profits at least the next day or the days to come. I personally do this because I don’t like losing money and in most cases I make money following the above procedure. If you hold a stock for more than one day, you fall under the category of ‘Swing Trader’.
◦ The second thing you need to check while picking a stock is the volume of stock that is being traded. Imagine you bought a stock and you want to sell it, but there are no buyers. A situation like that may occur. So you need to check the volume that is being traded. The second reason to check volume is because more the volume the greater the interest of traders in that particular stock. Another thing to keep in mind while checking volume is you should make sure that the volume is consistent. Due to a catalyst like news or earnings report there is a chance that the volume traded is high but the following day it could be low. So don’t depend on ‘volume traded’ for just one day. The volume traded must be consistent. You can check the volume on your broker’s app or use third party apps like Moneycontrol etc. Another thing you should know about volume is, volume is high for stocks of lower price and the volume is low for stocks of greater price. Wondering what the aforementioned is ? Here’s an example, imagine the price of the stock is ₹50, more people can afford that stock, therefore more people tend to trade that stock and therefore the volume of that stock would be high. Now imagine that the price of the stock is ₹5000, less people can afford it and therefore the number of shares traded would be less. So just because the volume is low doesn’t mean that you shouldn’t trade that stock or just because the volume is high doesn’t mean that you should trade that stock. The word to look out for is CONSISTENCY, basically there should be liquidity.
◦ The third thing to look out for in a stock is volatility. One can make money by day trading only if there’s volatility. Volatility in stock market is usually denoted by ‘Beta’. In general the beta of stock market is 1. If beta of a stock is less than 1 it indicates that the stock is less volatile than the market in general. If the beta is greater than 1 , then it indicates that the stock is more volatile than the stock market in general. Now you may be wondering how people make money if the Volatility is less aren’t you ? The answer to that question is dividends. Companies give out timely dividends to their shareholders in some cases, so people don’t mind holding such stock in spite of it remaining stagnant with respect to price.
So the stock must be evergreen, have good liquidity and volatile. That’s how you pick a stock.
Now comes technical indicators. The three indicators I use are MACD, RSI and Bollinger bands. I’ll explain you regarding all the three without getting to technical details.
◦ Let’s start with MACD. It stands for Moving Average Convergence Divergence. The journey or the trajectory in stock market contains summits and valleys. And in case of MACD there are two individuals who follow this trajectory. The journey starts at the bottom of the hill. Imagine the two individuals to be Ram and Sam. But before starting they both criss cross their positions. And they move atop the hill. On reaching the summit they again interchange their positions and walk downhill, the aforementioned keeps on happening and the hill and valleys keeps changing to the adjacent. What does this signal ? The answer is when Ram and Sam interchange their positions at the bottom of the hill it is a buy signal and when Ram and Sam interchange their positions at the summit it is a sell signal. Basically when two lines of MACD cut or crisscross each other at the trough it is a buy signal and when the line cut again at the crest it is a sell signal.
◦ Let’s now move onto RSI. It stands for Relative Strength Index. If RSI hits 20 then it is a buy signal and if RSI hits 80 it is a sell signal. Some people use 30 and 70, if RSI hits 30 then it is a buy signal and if RSI hits 70 it is a sell signal.
◦ Now comes Bollinger Bands. These are similar to a building which has a basement, ground floor and first floor. If the stock is at basement people buy it assuming it would reach to first floor. And if it is above first floor people sell it assuming the price would come back to ground floor or basement.
Nothing technical, I hope you got that. If not feel free to DM me.
Well, we know how to pick a stock and the technical indicators necessary to trade. Now let’s head directly to trading. You should buy a stock when Ram and Sam crisscross each other at the valley, also the RSI should be on the lower end or middle end and price of the stock should be within the Bollinger Bands. Well now you’ve bought the stock, the next question is when to sell the stock. If you plan to sell the stock same day and book your profits you can do it, but there’s a con to this. Imagine the price keeps on getting higher and higher on the coming days but your capital is same, as a result of this the number of stocks you can buy reduces and so do the profit, provided the profit value (eg. 50 paise per stock) is constant. In other words imagine the stock price is ₹50 and you have ₹10000. The number of shares you can buy is 10000/50. Now imagine the stock price is ₹60 but your capital is still ₹10000. The number of shares you can buy now is 10000/60, which happens to be less than the previous value. So how to overcome this ? Here’s the solution, don’t sell the stock on the same day, instead short sell the stock on the coming days. For those of you who do not know what’s short selling, here’s the answer. You sell your shares first and then buy back the sold shares. Here’s an example, imagine I bought a stock at ₹50 and the following day the price is ₹52. So I sell the stock at ₹52 and buy back the shares at ₹51.50. The difference of ₹0.50 is my profit per share. However one thing to note here is, only 80% of your selling value will be available to you on the same day and you should be having the remaining 20% of money in your account to buy back shares. Now imagine in 20 days the stock you bought at ₹50 hit ₹60. Your profit now is ₹10 per share and ₹0.50 multiplied by 20, (assuming you shorted the stock for 20 days). The value you get now is higher than the value of that person’s share who is a long term investor. The long term investor only made ₹10 per share while the day trader made that ₹10 + (₹0.50*20) per share.
Before going further let me explain risk associated with short selling. Imagine you bought a share of ₹15 and the price of that share hit ₹0. In this case the loss is only ₹15 but imagine you sold a stock for ₹15 assuming you can buy it back at ₹12 but the stock instead of going down moved up and this time the value is ₹50. Now your loss is ₹35. Which happens to be greater than ₹15. So while shorting you can lose a lot more than you gain. So setting a stop loss is very essential. Another thing to note here is circuit limit. Most stocks have circuit limits and an example of it could be 20% upper circuit limit and 20% lower circuit limit. It just means that a stock cannot move more than 20% or drop down more than 20%, within a day. However, there can be exceptions to it. I would like to give you guys a small homework, just Google about how Yes Bank collapsed within a day and did the circuit limit function or not.
Now let us get to the real business. I missed out one more point while mentioning how to pick a stock and that is choose a stock that is part of an index. It’s not mandatory but choosing a stock from an index is good and here’s the reason for it, I personally trade a bank stock and it is part of the index called BankNifty. If any major banking news that can change the direction of the index occurs then while trading the stock I also keep checking whether only the bank stock I’m trading is going up or down or whether the whole index is moving in a particular direction. However, there are some exceptions to it, sometimes the stock I trade behaves in an independent way with respect to the bank index.
Now comes what do I check while trading. And the answer to it is supply and demand. Everybody know the rule of supply and demand and for those of you who don’t, here’s the answer, when demand is higher than the supply the price increases and when supply is more than the demand the price reduces. My broker provides something known as market depth which shows the supply and demand and I take trade based on this. For example, if the supply exceeds the demand by 3 million stocks then it is a sign that the stock falls by 20 paise. And that’s how I trade, however the aforementioned value is not a constant. I place a bet even when the difference is 5 lakhs or 10 lakhs. Now comes the question how does the price move under a catalyst, if there’s a bad news then the number of sellers outnumber the buyers and if there’s a good news buyers outnumber the sellers. The news in most cases can be directly proportional to how the stock moves. If the news is just for one particular company then only that particular company’s stock moves but if the news covers an entire industry then the entire index may move accordingly. For example, if RBI says something in favour of the banks the then the entire banking index may move positively but if the news is bad then the banking index moves downward. And if the news specifies only one bank then only that particular bank’s price moves according to the news. If the bank is part of an index then even the index would be affected by the news but since the index would be having other banks too the direction of the index actually depends on the magnitude of the price of individual stocks within the index.
Now let us talk about placing the bet. Timing plays a vey vital role in day trading. For example, the first 1 hour can be very volatile, if you can’t do high speed trading then it’s good to avoid the volatile hour because market would still be settling and you can place the bet once the pace reduces. Besides that you also get to know something known as OHLC which stands for Open High Low Close, the Close refers to the closing price of the stock on the previous day and the Open stands for opening price of the stock on the trading or current day, and the High stands for maximum price the stock has hit in the day and Low stands for the lowest price the stock traded for the day. This gives you the boundary of the stock, for example imagine a person in a building that has ground floor plus five floors. The ground floor is the low and 5th floor is the high and the person is the stock’s price. That indicates the buyers are strong at ground floor and sellers are strong at fifth floor. My typical trade would be sell at third floor and buy at second floor, provided the market depth shows sellers are strong. Let’s assume each floor to be of a value of 20 paise and ground floor to be zero. So G + 5 would be 1 rupee. And I actually sold the stock when the stock was trading at 60 paise and bought back the shares when the price hit 40 paise. My profit is 60 – 40 = 20 paise. If I bought back the share at 1st floor then my profit would be 40 paise per share. Sounds small but if it’s multiplied by decent number of shares then the profit too would be decent. I typically aim only for 20 paise because the stock I trade tends to oscillate. If I don’t book my profit at second floor there’s a chance that the stock may hit fourth floor which happens to be 80 paise. If I sold at 3rd floor which is 60 paise and buy at fourth floor then I would make a loss of 20 paise. So I book my profit early. There are cons of doing this, you can make money by doing the aforementioned but the magnitude would be small. 20 paise is small isn’t it ? Well before understanding how to make more, let’s talk about risk and reward. There’s something called risk that is money you lose and reward which stands for money you make. The thumb rule is 1:2 which means lose 50 paise on wrong trade and make 1 rupee on right trade. The final amount would be 1 rupee minus 50 paise which is 50 paise and that is a positive number. Well we were talking about 20 paise right ? Imagine you placed two right bets where you made 20 paise on each trade, now your total would be 40 paise. On the other hand imagine a person made 1 rupee on one trade and lost 50 paise on another trade. Now the new profit would be 1 rupee minus 50 paise which happens to be 50 paise. Now this new number is bigger than our previous example where we made 40 paise after two trades. In one case there was a profit and a loss and in the other both trades were a profit and yet the number was bigger in the first case. That’s risk and reward. Now imagine a third case where you made 20 paisa on first trade and 1 rupee on second trade, your profit now is 1 rupee 20 paise, which happens to be way bigger than 50 paise. Isn’t that cool ? So how do you fall under the third category. The answer is simple make 20 paise on regular days and 1 rupee when there’s a catalyst. Catalyst means strong move which is usually one sided. Usually it’s the news that acts as a catalyst or technical indicators when vast majority of people are placing bet based on technical indicators. Note, you can make 1 rupee even on normal days of less volatility but you should increase the number of bets. Recently, I placed seven bets on a single day out of which 6 bets were of a profit of 20 paise each and 1 was a bet was of 25 paise. But if you have to do that you need to stay in front of the screen the entire trading hours to pick the moves. Well day trading isn’t that easy ain’t it ? In my case I prefer health over money so I place less bets. Sometimes I finish my trades before 10:00 a.m. well enough of exaggeration let’s get to business. Note, I said about timing right ? And I asked you to know about the boundaries. Well, as time passes the boundaries get broken too, if market is in favour of a particular direction then there’s a possibility that the stock may even move to 7th floor or the the stock may even go to lower basement. It’s the supply and demand that decides the direction of the stock.
Well now comes the things that you should not do. Well, earlier I said that I sell at third floor and buy at second floor right ? Imagine I sold at lower basement and that is the lowest floor. The stock bounces from that point and when I initially started trading I blew a huge sum of money by shorting at the low. So golden rule is don’t short at the low. If you have to short at the low then supply should outperform demand. Imagine 1 crore sellers and 10 lakh buyers. That’s one sided and indicates that the price may go further down. So only in such a case one might short. And then comes going long, imagine there are only 5 floors in a building and you bought the stock at 5th floor. Where will you sell it ?
If you have to do a thing like that then ensure that the buyers are strong. Example of it is, 1 crore buyers and 10 lakh sellers. I used the term buyers and sellers but the word should be number of shares.
Now comes market manipulation, someone might place an order and you might place a bet looking at that order. Imagine someone placed a buy order for 1 lakh shares at the price of 51.25. And the market is trading at 51.35. You might think that the buyers are strong at 51.25 and you may place a bet for long order at 51.30 now imagine they cancelled that order. Aren’t you trapped ? Also some may go for market orders in large numbers and this can fluctuate the flow of demand and supply. Well that was a caution. So sudden change in supply and demand may sometimes cause losses. How to overcome that ? Well, experience is what I call that can make you place the right bet and overcome market manipulations . If you look at the supply and demand daily then you’ll get used to the flow and your brain gets adjusted to it. Also when looking at the supply and demand there something similar to Cricket. In cricket grounds there’s something called 30 yards circle and then comes the boundary. Similarly in stocks too there’s a 30 yard circle and the boundary. Imagine the stock is currently trading at ₹50 then the 30 yards circle would be ₹49 and ₹51. Imagine people are placing orders at ₹48 and ₹52. Now that’s the boundary. Usually people look at the total number of supply and demand and if people are placing bets at the boundaries it can mislead you. There’s a high chance that the ball may go the the hands of the fielder in the 30 yards circle and be thrown back to the wicket which happens to be ₹50. So looking at the bets within the short range also should be an essential thing while placing a bet. Now imagine there’s an overthrow by the fielder while trying to hit the wickets. Ohh, getting too complicated isn’t it ? It’s currently 11:49 p.m. as I’m writing this post and I’m not finding easy ways to explain stuff. Don’t worry there’s tomorrow, so don’t forget to subscribe to my blog. Because if I miss something I‘ll be explaining it in the days to come, so if you subscribe to my blog you’ll not miss it. Also subscribing is free. Caution – I post on other stuff too like business, fashion etc. so you may end up receiving notifications for those too. So if you are not interested in subscribing it’s okay but at least remember the name of my blog so that you can come back for future reference.
Let’s get back to business, I mentioned about MACD right ? Ram and Sam climbing the hill. Well imagine Ram and Sam tend to jump while climbing the hill. The stocks too do the same. So you should sell when Ram and Sam are in air and buy back the share when they touch the ground. Long term investors only take walking into account. They buy stocks when Ram and Sam start their journey at the bottom of the hill and sell their stocks when Ram and Sam reach the top of the hill. And this is where day traders earn more than long term investor. They take jumping into account. Another thing to note is stocks jump multiple times in a day. So a full time trader can make really good amount of money.
This post is getting lengthy and it’s mid night. So I‘ll talk the rest in future posts.
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If you are beginner then check out my post called Stocks Lesson 01.
Byeee for now 🙂