Making Money through Stock Markets: Attractive?-Yes. Easy?-No. Quick?-May be.

                                                                                                                                

"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???            

              

Well! There are several caveats:

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.)

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