"It is not easy to make money in the stock markets, especially in a short period of time."
Many of us have already read
these lines in one form or the other. But when one starts
dealing in stock markets, they look way too attractive to make easy money. They
are like those perceived oasis in the deserts.
So, here is the story of my
attempt to search for what works best in these lucrative and dangerous stock
markets.
I have recently completed my
MBA from IIM Calcutta this year. Since I opted for majorly finance and
economics courses in year 2, I was naturally attracted towards stock markets.
I asked my father to manage
his Portfolio of stocks. Trusting me, he gave me 100% liberty to make any
changes in his portfolio as I deem fit.
There was a big challenge as well as an
opportunity in front of me. I was my own boss.With the help of the knowledge I gained during the MBA, I carefully
selected a set of stocks intended to be held for the long term (1-2 years).
*But this article is not about the long term investing techniques!*
I still was not satisfied
after completing the task and wanted to explore more. Obviously, like many
others, I fell for Intraday Trading! Intraday trading looked like a real
beauty. A lot of money in just a matter of few hours! Sounded like a perfect
plan to me!
All I had to do was Buy (Sell) the stocks when the prices were Low (High), and
Sell (Buy) them as the prices went Up (Down). Book Profits. Done!
Wait. If all this was that easy then why the hell are people working their
asses off the entire day? Why not we, our parents, their parents and everybody
just sit on different terminals and cash in easy money daily from 9:15 a.m. to
3:30 p.m. and then just enjoy???
1) The transaction (i.e. buying/selling of stocks) is not free. A considerable amount of brokerage is involved when a person buys or sells a stock. (My broker charges me 0.03% brokerage for Intraday buying/selling of stocks). Hence, you need to make sure that the profits you are booking should be big enough to cover up for these costs.
2) Brokerage is not all what an Intraday trader is charged for. There are a
lot of other taxes involved as well: Cess, Security Transaction tax (watch out
for this one, it eats a lot of money), Service Tax etc.
3) Sometimes the stock prices don’t go in the expected direction. The
reasons can range from wrong calculations/expectations to "it was not just
your day". In that case, yes! You have to book losses as you have to compulsorily
close your positions by the end of the trading day, else your broker will. The latter situation attracts penalty.
4) No matter whether you book profits or losses for the day, you have to pay the brokerage and other taxes. Hence, your profits appeared divided and losses multiplied.
5) It is very important for the trader to know where to stop her losses. One of the most difficult and the most important tasks a trader has to undergo is to book losses at the appropriate time. It is crucial to contain and stop losses whenever they cross a certain point (the point varies according to the loss bearing appetite of the trader). Traders simply just don't want to register losses and keep on trying to average out their losses. This generally results in over-trading with traders ending up making even more losses.
Can't
blame them, its basic human nature. Who likes making financial losses? So, as a
day trader you need to learn to keep greed, hope and fear at bay. Decisions
should be governed by logic and not emotion.
The above 5 points makes it
very difficult to cover up losses once your balance goes negative. Also, you have to be very sure of the stock and the direction you are betting on. This is
necessary as you might be able to earn from luck for may be a day or two in
weeks, but if you go slightly out of luck on even one day, you can suffer huge
losses. These losses can probably be big enough to wash off all your gains
accumulated over a period of time. Remember you are paying those taxes
and transaction costs anyway.
*Coming back to my story*
By the time I knew all of
the above stuff through practical experience and theoretical knowledge, my net
Intraday trading balance had been already negative.I thought the same thing as
many of you may be thinking right now:
"Is there any technique/analysis
that can guarantee me profits?"
OR
"Can I perfectly predict the
fall/rise of a stock?"
I continued my search for the answers. I found several established and well tested
methodologies that predict the direction of the stock movements. I back tested
every one of these techniques on certain day trading stocks (the one with
high trading volumes, volatility and liquidity) for a long period of time. I
then separated out the techniques which perfectly worked for at least 85%-90%
of the times.
Two of the simplest yet effective techniques I successfully back tested on
certain choice of stocks are*:
a) Day's first Candlestick approach**: At 9:30 a.m. notice the high and low
points of the day's first candlestick (DFC). Now, compare the close points of
the subsequent candlesticks with the high and low points of the first
candlestick. The moment a candle stick closes below (above) the low (high),
short sell (buy) the stock. Post this wait for either your profit target or
stop loss point to trigger and then close your positions. (P.S.: As a stop loss point
you can use the low (high) point of the first candlestick in case you are
holding a buy (short sell) position.)
b) Comparison with the previous day high**: If a stock opens up at 9:15 a.m. at a price higher than its previous day high then buy the stock. In case it opens up at a price lower than the previous day's low, short sell the stock. Post this wait for either your profit target or stop loss point to trigger and then close your positions.
*By no means I am endorsing these techniques
 |
| DFC Approach** |
b) Comparison with the previous day high**: If a stock opens up at 9:15 a.m. at a price higher than its previous day high then buy the stock. In case it opens up at a price lower than the previous day's low, short sell the stock. Post this wait for either your profit target or stop loss point to trigger and then close your positions.
 |
| Opening at less than the previous day low** |
 |
| Opening at more than the previous day high** |
*By no means I am endorsing these techniques
** Technique ideas and image courtesy: https://www.niftytradingacademy.net/wp-content/uploads/2017/01/Intraday-Trading-Techniques-Sell.png
Hence, next Monday I was all charged up and determined to cover up my
losses via these techniques. I did precisely as the techniques suggested and
only for the stocks I used for back testing.
Surprisingly! the results were
perfect. I made good money on all my transactions that day. But sadly at the
end of the day I realized that the transaction costs ate more than 60% of my
day profits.
Also, unlike that day all these techniques did not always work
well. It was just that they worked well for most of the stocks on most of the
days. But then there is no guarantee.
Hence, No, there doesn't exist any magic
formula that can give you sure shot returns.
After all this I realized how easy it was to lose money, but so difficult
to make up for it. Hence, I deeply thought about the point 5) mentioned above
and decided to book losses and gave up the Intraday trading. There were several
reasons for my decision apart from the 5 caveats I already mentioned (Hence, I
will start from the serial no. 6):
6) Intraday trading is too much time consuming and stressful. Trust me! It's
neither easy nor a pleasant feeling to sit continuously in front of the
computer screens for 6 straight hours watching the stock price charts going up
and down. Though it's a great feeling to look at the stock prices going in your
direction, but extremely stressful the other way. I felt like I was wasting my
time which could have been used for much more productive purposes.
7) It is not easy to compete against hi-tech algorithmic machines, banks
and high frequency traders. All of them have a super quick access to any news
that can have a big impact on the stock markets. They are extremely fast and
accurate in using this information in their favor. Plus owing to their huge
capital, expertise and knowledge, it is possible for the big trading firms to
move the trades in their direction. Hence, if you want to beat them, you have
to be better than them (which necessarily requires a man + machine combination).
All the 7 points mentioned
above makes the idea of Day Trading extremely RISKY and difficult. High risk not
only means a high upside potential, but also a high downside potential.
Moreover, once commissions and slippage are taken care of, most Intraday
trading systems fail. And even if you do find an edge, it usually won’t last long.
Hence, at this point in time I have finally realized that the road Mr.
Buffett suggested despite being more thorough, time consuming and requires a
lot of patience, is way better. It encourages
you to build the foundations. There is no way in which one can make fast, risk
free and easy money.
This entire blog post indicates my personal point of view. If you think otherwise or have any
comments, please feel free to share.
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THANKS AND HAPPY READING, ADIEU.
ISHIKA GUPTA
