What are the precautions intraday trader should take?

What Precautions Intraday Traders Should Take 1 What are the precautions intraday trader should take?

Intraday trading is not rocket science not is it about taking on obscene risks. On the other hand, intraday trading is a lot more about discipline and taking measured risks in the market. Unlike what most people believe, intraday trading also involves in-depth understanding of the stock and the charts. Here are some basic steps you need to take to make a success of intraday trading.

Intraday trading begins and ends with managing your risk

Sounds strange but there is a lot more of risk management and capital protection measures involved in intraday trading than what you may care to believe. The primary rule here is to set limits to the losses that you are willing to take. How much are you willing to lose in a trade; ideally it should not be more than 2-3% of your capital. Then you ask how much are you willing to lose in a single day; it should never be more than 4-5% of your overall capital or 20% of profits till date. Finally, also keep on how much of net worth depreciation you are willing to handle. It should not be more than 20%. When you reach that point, get back to the drawing board and rethink your intraday trading strategy. If you take care of the risk, the returns will be taken care of.

Always trade on the same side as momentum is dictating

Quite often, the market tries to indicate or give a hint about something that may not be in line with your basic trading logic. For example, the entire market may be bullish on Reliance but the market may be indicating weakness. That is because the market is trying to give you a hint. A good intraday trader always listens to such hints. For example, Trader A had a view that since the stock had rallied 15% in the last one month, it must be ripe for a correction. So he tried to short sell the stock and gave up after his stop loss got triggered twice. Trader B bought with 20% of his allocation and decided to wait for a dip to buy more. What is the difference in their approach? While A is trying to outsmart the market, B is playing conservatively on the side of momentum. When you trade intraday, trend is always your friend and you are unlikely to make profits in intraday trading if you try to adopt a contrarian approach to outsmart the market.

You have to get familiar with charts; it is too serious to be left to others

If you think that charts and technicals are too complicated, then just think again. It may be hard to understand but with a little bit of effort you can get comfortable with charts. Even if it is tough, you need to invest in charts because it is your money after all! As an intraday trader you need to develop the ability to read some basic technical charts on your own. Use support levels to put buy orders and resistance level to put sell orders. Watch out for decisive break-outs above the resistance and below the support with volumes. These basics of technical analysis can go a long way in improving your intraday trading performance. A good intraday trader is always self-driven when it comes to reading charts. It has to reflect your personality.

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As an intraday trader; don’t be obsessed with the buy or sell side trades

Two-way trading lies at the core of intraday trading strategy. If you want to make money in intraday trading, you need to be prepared to trade the market both ways. The advantage is that you buy when the momentum is favourable and sell when momentum is unfavourable. You need to be dictated by the momentum indicators in the market and not try to outguess the market. If the market dictates to play long or short, you just need to execute accordingly. That is the safest approach in intraday trading.

Document, document and document; that is the key to learning and performance

A trading diary is the ultimate weapon of every successful intraday trader. It is not just a record of your trades and the logic behind trades. It is also an important part of your learning process. You must spend an hour each evening reminiscing the day’s trades, identifying what went right and what wrong. It is these useful insights that will gradually become your habits and eventually help you become a more successful intraday trader.

As we said earlier, intraday trading is nothing akin to rocket science. Take some basic precautions, avoid pitfalls and you are in business!

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