Tuesday, June 14, 2011

BSE / NSE Day Trading - How to Guide

It's no secret that stocks can earn phenomenal returns in the long term. Some of the shares in Warren Buffett's portfolio were picked up almost 20-25 years ago. But Jayesh Shah doesn't have so much patience. "I don't remain invested for more than 20-30 minutes," says the Ahmedabad-based bank manager. Shah dabbles in stocks and makes an average of Rs 12,000 a month with his ultra short-term trading strategy. Viral Nagori, who teaches computer science at a government college in the Gujarat capital, has a relatively longer investment horizon. He sells his stocks as soon as he is Rs 800-1,000 in the green.

Welcome to the world of intra-day trading, where tens of thousands of small investors throng every day to make a fortune from the minute by minute change in stock prices. Small businessmen, retirees, salaried professionals, academicians, even students, are playing the intra-day market and making money from it. They buy stocks in the morning and sell them before the closing bell, pocketing profits from the trade. Of course, they often end up making losses, but this does not stop them from starting afresh the next day.

It's a world where many of the established canons of stock investing are turned on their heads. "Day trading is a different game with different rules," says AK Auddy, executive director of intradaytrade.net. The website gives daily tips on stocks for day trading to its members. No long-term holding is advised here. You have a window of just about six-and-a-half hours and it gets smaller by the minute. You must square your position by the end of the trading session. Also, don't diversify your bets. Put on your blinkers and focus on just 1-2 stocks.

For the buyer, the biggest draw of intra-day trading is the instant gratification it offers. You can literally see your money grow as the stock price goes up. It also gives the buyer the feeling that he is in control of his finances. "When you invest in a mutual fund, you have to wait for the net asset value (NAV) to go up. Here, you can see your profits immediately," says Nagori.

High rewards at high risk

Just as day trading can be a great way to make money, it's also an easy way to lose it. Don't look at this as a gambling den where luck, hope and prayers can get you through. Intra-day trading is not an art, but a science. To succeed, you need to use the right tools and have a disciplined approach. Follow the rules and you can make money. Think out of the box, and you could lose your shirt.

Nagori has learnt the tricks of the trade the hard way. He used to dabble in penny stocks and lost heavily when he got stuck with a large holding of dud shares. The share crashed immediately after he bought a large quantity. Unwilling to book a loss, which is one of the prerequisites of being an intra-day trader, Nagori decided to take delivery and wait for the stock to recover. In the following days, the stock drifted even lower, but Nagori held on to it hoping for a turnaround. The scrip was ultimately delisted. "You learn from your mistakes," he says. Now, he trades only in large-cap index-based stocks such as Reliance Industries , Maruti, ONGC and RCom, and makes sure he squares his positions by the end of the day.

In fact, squaring the trades by the end of the day is crucial for the day trader. "Before you buy shares, you should be clear whether they are for intra-day trading or for investment," says Vikas Jain, senior manager, mid-cap research and derivatives, Motilal Oswal. This is because the buying rationale is different for both. The stock for day trading is usually driven by momentum and technical reasons, while the fundamentals are behind the stock bought for investment. "Converting an intra-day trade into a long-term holding can lead to avoidable losses," says Jain.

The good part about intra-day trading is that you can be both a bull as well as a bear. Though day traders bet on the upside most of the time, you can also sell shares to gain from the downside. Being a bear is a little more tricky than being a bull. If you buy shares and are unable to square the transaction by the end of the day for whatever reason, all you stand to lose is the liquidity and risk of holding the shares for 2-3 days before you get the delivery. But if you sell and are not able to square the deal, there's a penalty waiting for you. So, square the sale transactions well before the closing bell.

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