Once we enter into the trade, there are only 4 possibilities. Either that trade will turn into a big profit or small profit or small loss or big loss. We don’t know the future so it is not possible for us to know in advance what will ultimately happen. But it is always possible for us to avoid this “big loss.” If we are able to do that then the trading will become profitable for us because small profit will take care of small loss and we will be left with big profits.
We always work in right direction and follow the above trade plan to avoid “big loss.” We will never overtrade and our SLs are very small compared to profit potential. So ultimately we are able to avoid this “big loss.” Now we should focus on frequently getting the “big profit.” Let me discuss how,
After entering into the trade, the trade will typically behave in following 3 ways.
1) After the entry, it will hardly move in our favor and it may soon reverse. In this case, most likely that trade will end up hitting our small SL.
Solution: We cannot do anything here. We will have to accept the small loss. There may be different reasons for that happening. Maybe the volatility becomes too high, maybe just a false trigger, or maybe simply no follow-through. These things are not in our control, so again we cannot do anything here to improve on that.
2) After the entry, it may so happen that it starts to move in our favor but cannot reach close to the target. Lets say it moves half way to the target or a reasonable good profit but not beyond that. So what to do in this case so that we can protect ourselves better.
Solution: If that happens, the best way we can mange this trade is that we trail our SL. We can trail our SL to half of our original SL. If Rs. 2 was the initial SL, we can now trail it to Rs. 1. This way it will ensure very less damage if the trade suddenly reverses and forces us to exit. So by managing the trade this way, again it will cause us very little loss. If it gets very close to target and quickly reverses without allowing us to book out close to target, we can also trail SL to just around our entry point and exit out of it as a scratch.
3) After the entry, it is possible that it quickly moves in our favor and reaches very close to target or bang on the target. In that case, we can book out completely at the best available price. Our objective of trading is achieved by making a big profit here.
Also to manage the trade better, it is essential that we never enter into the trade far away from recommended price. If it does not allow to enter around the price level, we will just let it go. We will never worry about it and focus on next trade setup. If somehow we manage to enter into the trade slightly away from the recommended price level, we will always make sure we adjust our SL and target price accordingly. E.g. if enter long at 502.30 instead of 502.10, adjust this 20 paisa into the SL and target price, so if prices reverse we will exit 20 paisa early and if it hits target, 20 paisa late.
Bracket order is the kind of order placement utility which allows us to enter into the trade with predefined stop loss or trailing stop loss and target price. You can read more about it and how it works by clicking here.
Many a times bracket order becomes quite useful when the volatility is very high and we need to enter and exit quickly. Also it allows us to trail stop loss and help manage the trade better. No need to say that it also requires us to keep very little margin, as low as Rs. 11K, as our risk is managed.
So all in all, Bracket orders are made for the intraday traders like us who like to trade in high risk instruments like futures and options but still want to control the risk and manage the trade better.
This is the most frequent and common question that I have been asked whenever I interacted with other aspiring traders. In fact, frankly speaking, I was also looking for the answer to the same question when I started trading. There were different answers to it, some said 200 points a month from trading Nifty is considered good for making a living out of it, some said 300 points, and some even said 100 points. I thought no one exactly knew how much.
Later after some time, I realized it is not necessary to make 100 points or 200 points per month per Nifty lot for living. I can make a living out of it even with lets say 10 points per lot per month. Yes, you heard it right. Let me explain.
Many traders pay so much attention to their long-term objective of becoming a professional, successful trader or expanding their trading account in the fastest possible way. In that process, they make very little or no effort to figure out how exactly to achieve this in a more realistic way. I was aware of this, so did not do that mistake. Now, to achieve the goal of making a living out of trading Nifty, I thought if I set the goal of earning as little as 10 points per month per lot, since it sounds very little, it will be very easy to achieve it successfully and once I achieve it, I will be able to do a lot better and finally will be able to achieve the long term objective of becoming a professional trader. I started doing some calculations like this,
Net 10 Nifty points per lot per month = Rs. 750 per month on a capital of Rs. 10000.
Then I calculated my yearly earning like this,
Rs. 750 per month x 12 months = Rs. 9000 a year.
This way if I calculate the earning on a capital of 12 lacs, it will be like
Rs. 9000 per year x 120 lots = Rs. 10,80,000 a year or Rs. 90,000 a month or roughly Rs. 1 lac a month.
My eyes popped up when I realized even though I make this tiny profit of Rs. 750 per month per lot, I will be able to double my trading capital almost every one year. Then I calculated further and got amazed by the results. It turned out that trading capital of around Rs. 12 lacs will be able to generate a monthly income of Rs. 1 lac if I am able to make as little as 10 points per lot per month. Furthermore, I really don't require this huge capital (not really a huge nowadays) at all for trading. I will always have an option of using shares, gold, liquid funds etc as a margin for my trading and real requirement for the cash will be very less.
I felt I needed to understand the markets first, get proper knowledge of trading and acquire some experience by simulating trading. Once I do that and get equipped with all the knowledge, I can start with a very little trading capital of Rs. 10K. My objective is to only make 10 points per month, month after month consistently. I know if I am able to do that, within next few years of time I will be able to earn Rs. 1 lacs per month on my own. After that nobody will be able to stop me and only the sky will be the limit for me as a trader.
I decided to act on this. I made an effort to understand the trading and markets. The learning phase took lot of time. It was very difficult to find a trading mentor those days. I had to do lot of trial and error method. But I did not lose patience. I kept on working on it until I found this wonderful DP method of trading. After spending few years on it and finally achieving this goal of earning 10 points per month, I was confident enough to take up the trading as a source of living and I could quit the handsomely paid 9 to 6 kind of a day job.
Now tell me, isn't it possible to make 10 points per month You would probably laugh at me and say this is what I can make in one trade alone, actually more than that. Am I right or wrong? It is not necessary to trade only Nifty future or options. You can set your goal the same way and can choose to trade your favorite stock, commodity or currency. You can even pick the trading system of your liking, be it mechanical, indicator based or any other discretionary system. You can also choose your number of trading hours. No need to be a full time trader.
Start small and then build up.
Go ahead and start working on achieving this goal. If you are able to earn 10 points per lot per month consistently for 9 consecutive months, you can contact me. I will feel proud to associate myself with you and if required, help you get more funding for your trading.
I would like to tell you without a doubt that trading in the markets is not like gambling at all. Trading is simply a vehicle to generate cash flow just like a business, whereas gambling has a fixed odds system for all major games. The market does not have any unfair advantage as with casino style games, card games or racing.
Many gamblers visit casino or casino like place, step up to a table to play a game with money on the line and hope to earn a fortune. However, these gamblers fail to understand that the massive casino that they have stepped into was built with the money lost by people before them who didn't understand the odds that the casino that hosts the game makes sure the odds are tilted in their favor, in the favor of “house”.
Unlike gambling, in trading the traders will be dealing with markets that do not ultimately care whether they win or lose. With enough knowledge about the markets and trading, expertise on the trading method, extreme discipline, dedication and honest and genuine efforts, traders can profit in the market. However, if traders approach the market with random abandonment, then the market can and will cause serious pain.
Now let me try to help you recognize if you are displaying characteristics of a gambler and not a trader.
1. Trading without proper understanding of markets and trading system.Few weeks back I did a small quiz to help traders test whether they have a sound understanding of the trading system that they trade with. If you have not been able to test your existing knowledge yet, click here. The eye-popping results were like this,
Less than 10% of the respondents scored complete marks.
More than 60% of the respondents scored less than 50% marks.
The results proved that majority of traders were trading without enough knowledge of the trading system. They lacked even the basic understanding of how the system works. By looking at the results one would never wonder why they were still losing money while trading. They took it as a sort of gambling and that is the main reason, they did not seriously think about educating themselves first and do all the preparation.
If you do not know how to drive the car, will you attempt driving it? If you do not know how to operate a patient, will you dare to do a surgery? If you do not know how to fight with the professional boxing champion, will you show courage to jump into a boxing ring? You will obviously not do it. Then why in trading, you start trading without knowing how to trade. Why do you treat trading differently? If you start trading without knowing how to trade, you will for sure harm yourself very badly, simply because you do not know how to do it. You will ruin yourself financially and emotionally.
2. Going all-in or taking large trading bets on small capital.If you find yourself going all-in on trading positions, this is a sign that you are taking unnecessary risks for the hopes of a windfall profit. For an example, you would be doing this if you have 100k cash, you use 400k margin on that and you are using all 400k for one day trade. If you like to take large option trade positions in the hopes of making 10x of your money, what you are doing is, just gambling. So if you find yourself occasionally or worst frequently going all-in on a sure bet, this is a clear sign that you are crossing the line from a good trader to characteristics of a gambler.
3. Overtrading.Gamblers will often try to bet themselves out of a hole, which most times leads them further into the ruin. As a trader, you can too display similar behavior with the market if you go on a bad run. No matter how good you are as a trader, you will encounter dry spells. It will feel like the market is against you and you are unable to pick a winner. Smart traders will either stop trading for a period of time or will start to take smaller positions until they are able to sort through their slump.
I remember a time where I was day trading and the market had given me a few losses by noon time. Instead of trading smaller or stopping altogether for the day, I decided to “beat” the market. I considered myself like a hero Rajnikant who can handle any worst situation and fight and beat hundreds of people. So I began taking on position after position, so much so that by the end of the day I felt like I had been through a mixer grinder.
Same way if you are becoming somewhat of a gambler, you will notice that the majority of the time you are overtrading. This need to overtrade is the same thing a gambler feels when they need to place more bets to “fix” the problem.
4. Overleveraging or using credit for trading.Under no circumstances should you be using credit cards or taking out loans or borrowing money from the loved ones to place money in the market. Think about it, the market already provides you margin which allows you to trade above the available cash on hand. Why would you need more money?
It is one thing to lose your own money, but you should never allow the market to place you in a position where you are going in debt due to your trading. If you can’t turn a profit with your own cash, what makes you think you will turn a profit with borrowed money? It’s not about trading larger in order to make money; it’s about trading smarter with what you have on hand. So if you are surviving on a borrowed capital, stop whatever you are doing and replace these funds immediately.
5. Mental stability.A major sign that someone is a gambler and not a trader is when they lose their mental stability. They will have mood swings that start to fly all over the place. They will be high as a kite one day and then completely depressed the next day. Trading if not treated as a business can have the effects on your relationships. You will find yourself avoiding your loved ones because you don’t want to face if they ask you how your trading is going. You will start to find time with your family as a distraction from your very important task of performing more and more market analysis.
Trading should have no impact on your emotions. You should remain as calm and as composed as ever. This is always the first sign of a good trader, the ability to stay completely flat in an environment that is filled with emotions such as winning and losing, fear and greed.
6. Trading rules.If you are finding yourself abandoning rules in order to place random bets in the market, you are not a trader. This is a clear sign that you are no longer concerned with establishing a rationale for your trades and have instead opted for the ability to place trades whenever and wherever you want. This sort of behavior is similar to the gambler who is not concerned with calculating odds, but would rather just stay in the game and place bets.
In trading, you have to have a number of fixed rules that govern how you do your trading and conduct your business. You require to make your own rules for identifying the trade setups, for entry and exit, for money management, etc. You also need to understand the rules of the market and you need to abide by those rules. There should not be any scope for deviation from these rules.
7. Record keeping.Are you keeping your trading records? Are you aware of your current profit or loss situation? If your answer is yes, then you are a good trader. If your answer is no, then you may be more inclined towards gambling rather than trading.
Good record keeping helps us measure our performance as a trader, rate our progress, and learn from our mistakes. If we do not learn from the past, we are doomed to repeat it. If someone wants to become a better runner, keeping records of speeds is essential for designing better workouts. If money is a problem, keeping and reviewing records of all expenditures is certain to uncover wasteful tendencies. Keeping scrupulous records turns a spotlight on a problem and allows us to improve.
8. Risk management.Before you enter each trade, do you determine where you will exit a position if you are wrong? Only traders will do this. Gamblers do not have that luxury. Having a stop is critical in every trader’s career; because it is your way of saying I am wrong in this particular situation. In fact stop loss is the only expense that we incur in trading. Brokerage or taxes are not the real expenses to run the trading business. Rather our loss is the only expense that we have to pay to successfully run the business. The chaos in the market can drive a trader insane if he does not know how to engage with the market and control the risk. Proper position sizing is also the essential part of risk management and all efforts need to be done there in order to minimize risk and ensure survival into the market.
In conclusion,Most people who attempt trading, do it very sloppily. Many a times they are not even aware of what actually they are doing, whether they are trading or gambling.
You have to be honest with yourself. If you are day trading and you tend to violate in any of the topics as discussed above, you will fail at trading. I know that sounds harsh, but it is the grim reality of the market. Market has a crazy way of separating people from their money when they do not follow discipline and refuse to remain within their limits and act erratically.
If you are planning to day trade for living, this post might interest you. Here I share my personal experience focusing on how the average person, with extensive or very little trading experience, can enter into the arena of day trading and creating wealth with some preparation.
Some time back when I decided to day trade for living as a business, I felt I needed to do some preparation in order to ensure my smooth transition from a fixed monthly salary job to a volatile kind of earning through the day trading. Due to the volatile nature of monthly earning in the trading profession, first challenge in front of me was to generate some sort of income through other sources so that I do not need to depend solely upon the trading for living. I thought this other income was very much required because it would not only take care of my day-to-day needs but also it would give me mental peace and I would be more relaxed and not under undue pressure to treat the trading as the only source of income. If you are thinking about taking up day trading for living, I would suggest you to do some preparation like this, so that you can plan it out the better way.
My first priority was to become debt free by paying out my loans which I did. After getting rid of loans and other liabilities, this is how I explored different options to generate some passive monthly income of around Rs. 25,000 which I thought would take care of routine expenses like grocery, utility bills, school fees for my kids. etc.
I had some funds that I saved over the years, mainly through PF, FDs and shares. I decided not to utilize all the funds for the trading and instead put it into fixed deposit and good liquid funds to generate around 8 to 9% of yearly risk free interest income. The amount of Rs. 10 lakhs was enough to generate monthly interest income of around Rs. 7000.
Sovereign Gold Bonds. I went ahead and converted the physical gold of roughly Rs. 5 lakhs into the sovereign gold bonds to generate 2.5% of yearly interest income. This guaranteed me monthly income of around Rs. 1000.
I also had an option of renting out a small old property after doing some repairing work which I decided to do. It helped me generate a monthly rental income of Rs. 5000.
Income through part-time work:
Since it was possible for me to work online at my free time from home, I decided to continue to do it for around 3 hours a day. After all this is what I did and worked for 15 years. I only required to spare 3 hours post market close. In addition to that I also involved myself in coaching and mentoring to help come up aspiring traders in a professional way utilizing my free time on weekends. Working parttime like this helped me generate an average income of around Rs. 12000 per month.
So everything was there, available for me. What I had to do was just plan it out properly to generate a continuous source of monthly income to keep me going in this highly uncertain day trading profession. Every profession requires time and experience to get settled and day trading profession is no different. There will be initial hiccups and initial struggling phase when starting out trading as a profession and hence it becomes pretty much mandatory to be ready with some other options. I kept on telling myself everyday that even if I could not earn a penny from the trading, I would be able to sustain and hang on to it with the help of passive income. This passive income was also very much necessary as I was the only earner in my small family.
If you are planning on entering into the day trading profession as a source of living, I would suggest you to do some well thought-out preparation like this. I am sure you will have some options like this or something different which will work out for you for sure. If you are living in a metro city like Bangalore, Mumbai or Delhi where standard of living is high, you may think about shifting to a much smaller town. It will help you cut your expenses to a great extent. You may have some piece of land in a village, which you can think about selling out to generate some funds for the interest income. You may be good at, for example, music or dance or writing or some kind of sports and you can involve yourself in coaching as a part time profession to generate some passive income. You can even utilize your marketing or consulting skills for that purpose. There are lots and lots of options. You just need to sit and assess your strength and weakness. Once you do that, you will automatically find a way to better utilize your capabilities and resources, and you will be ready to take your first step into day trading as a business.
In day trading, trade execution plays a big role and for the trade to get executed it requires us to place the order in time and at proper level. We also need to place the orders in such a way that it allows us to enter into the trade at our desired price. Entering into the trade far away from our desired price is not going to serve the purpose of trading.
Here are some guidelines that I follow for placement of orders into the system.
I first find a good setup to trade. Once I spot that setup, my next job is to identify a price level beyond which I would like to enter. Almost 100% of the time I like to enter with SL trigger orders at the identified level. There are two types of SL trigger orders in India which brokers allow us to do. One is SL limit order and another is SL market order. I hope you all are aware of these two order types, so I will not go into further details. Out of these two types, for entry I always use SL limit order. For exit, many a times it is safe to use SL market order. The reason is simple, exit is not in my hand. Exit is something which markets force me to do, so I will accept whatever price the markets offer me at that time.
1) Now how to place this SL trigger order. For Nifty or Bank Nifty is is quite simple. Usually, trigger price is at 0.5 point away from the level and keeping a 0.5 point of difference between trigger and limit for Nifty is enough. Sometimes while placing an order for direct BO setup, this difference has to widen to around 1 or 2 points for Nifty and around 5 points for Bank Nifty.
In stocks, order placement will vary from scrip to scrip. It varies because some scrips are of lets say Rs. 80, some are of around 300, some are around 500, some around 1000 and some even more than that. For example, if the stock trades at lets say 105, I will keep the trigger at 105.05 and limit at 105.10. Having said that, sometimes depending upon the volatility of stock, I may not allow any difference between trigger and limit and keep both at the same price level. For the stock trading at Rs. 450, I will keep the trigger at 450.10 and limit at 450.25 or 450.30. Similarly, for the stock quoting at 1400, it will be like 1400.5 and 1401. So here you might notice, depending on the price the stock is quoting at, I will have to adjust my orders. I cannot keep the trigger order at fixed price and also difference between trigger and limit will vary.
If you are trading in highly liquid cash stocks, placement of orders in this way will work most of time and your order will get executed for normal/average quantity in normal market condition. However, for stock futures, it is better for us if we also take into consideration the spread between bid and ask price. Let me discuss it more with an example of Titan future. Here in the snapshot of my broker terminal (SAS Online), notice I have kept both, price ladder as well as top 5 bids/asks. As you can see, for the LTP of 494.50 the bid rate is at 494.30 and ask rate is at 494.95, a difference of 0.65 which is not normal. Now lets assume, the LTP of 494.50 is your trigger level for entry. You wanted to enter a long beyond 494.40, so you kept a trigger at 494.50 and limit at 494.70. Now once the price hits 494.5 your order gets triggered, it travels from your broker to exchange with the limit buy price of 494.70. But it will just stay with the exchange and will not get executed because at that time the ask rate is 494.95 (seller's price). Now you have two options. One is either you match the seller's price of 494.95 and buy it at 494.95 or wait for the seller to come to you and sell to you at your price of 494.70. Instead of doing this, lets assume you were aware of this huge spread between bid and ask that was going on at that point and you were willing to buy even at slightly higher price and with that in mind, you kept your order like, trigger at 494.50 and limit at 495. In that case, there is high likelihood that your order will immediately get executed. So in nutshell, it becomes necessary to also take into consideration the spread and adjusting the placement of order or modifying it once the price reaches close to the trigger level for the trade execution. However, it all depends on urgency of entering into the trade. Many a times I will prefer to wait for my price. Rather than chasing the price, I will allow to let go the trade if it does not come to my price. There are lots of trade opportunities. If I could not catch this, fine. There will be always another waiting for me
2) Another important aspect of reading the price ladder for order placement is to check whether there is any big or good sizable order close to the trigger price. If there is any big order sitting there, I would wait for that order to get exhausted and then enter. Let me give you an example of SBI future below. The LTP is 302.40 and lets assume my trigger level for a long entry is at 302.60. As you can see in the snapshot, there is a sizable single order for sell at 302.70 of 11 lots. Now if my trigger is at 302.60 and limit at 302.70, I will be buying ahead of this sell order. It simply means even after my trade, there will be still big quantity left in the system to sell which will not allow prices to move in my favor for some period of time. So why not wait for that big 11 lots of sell order to get exhausted and then enter. So once I notice this kind of order flow into the system, I will modify slightly my trigger at 302.75 and limit at 302.80 or 302.85 to enter after that seller is over with his sell orders.
Sometimes due to certain market condition, even after taking care of different aspects for placement of order, it is still possible that the orders will not get executed and prices will jump the order. But that should not stop us in getting our act right. We need to be always vigilant of what is going on in the order flow side so that we can better position ourselves. Remember, there are plenty of setups happening all the time. If this stock does not allow me to enter, there will be always another one waiting for me.
Hope this post helps you in your order placement and better order execution.
The most essential requirement for day trading is "capital." Capital is day trader's lifeline. If you don't have money in your trading account, you will not be allowed to trade. It is as simple as that. Also traders need to have enough funds to withstand a string of losses and have the flexibility to take a wide array of trades.
Now in order to determine the funds needed for trading, risk management must be addressed. As a normal practice, traders normally follow a rule of risking only 1% or less of the total capital. It means, as an example, on a capital of Rs. 1 lakh, a trader cannot risk more than Rs. 1000 per trade. To make it easy for you to understand, here is an example. If you buy a stock at Rs. 100 and place a stop loss at Rs. 99, risk is Rs. 1 on the trade. If your trade position is 1000 shares, your trading risk on that trade is 1000 x 1 = Rs. 1000, i.e. 1% risk on a trading capital of Rs. 1 lakh. This trading risk always must be 1% or less than that of the day trading account balance. If you suffered few losses and your capital goes down to, lets say Rs. 90000, you cannot risk more than Rs. 900 per trade. So as your capital grows, your risk taking capacity will grow and as your capital shrinks, your risk taking capacity will also go down with it. By following this 1% rule, capital will be preserved during losing streaks, which inevitably occur. By only risking one percent, even a ten trade losing streak keeps most of the capital intact.
Proper utilization of trading capital:
We do not need to keep all the required capital in cash with our broker. We always can take some margin on our investments in stocks, mutual funds, ETFs etc. Lets say you decided to trade in stock futures and for that you require Rs. 1 lakh. You have also some stocks and ETFs worth Rs. 1 lakh in your demat. In that case, you can pledge these stocks and ETFs to your broker and get a margin of around Rs. 75000. Now you need Rs. 25000 only in cash.