Day trading is one of the most complex yet exciting forms of investing in the stock market. Despite being one of the riskiest trading types, millions of investors and traders enter the market to test their trading skills and fetch profits. Day traders are risk-lovers who do not mind taking calculated risks to emerge victorious. The following sections describe what day trading is, its meaning, features, and ways to trade efficiently.
What is The Meaning of Day Trading?
There are two broad types of traders in the stock market - positional and intraday. Positional traders invest in stocks with a long-term perspective. They can hold on to stocks for days, weeks, months, or even years. In contrast, intraday or day traders buy and sell stocks within a day and do not retain them overnight. Day trading is complex; so day traders devise, test, and implement various strategies to get an edge in the trading.
Day traders can trade in two ways - buy and sell. At first, they observe the market trend, which can be bullish, bearish, or sideways. The greatest enemy of a day trader is a sideways market trend with low volatility. However, they can perform efficiently when the volumes and volatility are high, and the market is either bullish or bearish.
When the market trend is bullish, day traders usually initiate long positions, which means buy first sell later. But, if the market trend is bearish, they often use margin money to sell first and buy later. If you have initiated a buy position, you expect the stock price to increase. But, if the stock price decreases, you will incur a loss. The same holds true for the selling side. Day traders often place a stop loss to reduce the losses in case the market goes against their predictions.
Why is Day Trading So Popular?
Every investor ever has thought of being a day trader. While some became spectacularly successful, others could not survive the fast-paced market.
Day trading is popular for a host of reasons, and some are listed below:
1. Instant Gains - Perhaps no other legal investment instrument provides you with as much returns as day trading. You can enter the market at 9 AM and exit any time before 3:30 PM with unlimited money.
2. Multiple Markets - Day trading is not restricted to equity stocks. You can also become a day trader in commodities, currencies, Exchange-Traded Funds (ETFs), futures, options, etc. Some day traders work in the stock market until 3:30 PM and move to the commodity market after that.
3. Leverage - Brokers like 5paisa provide leverage facilities to intraday traders. The leverage or margin amount depends on your eligibility. With margin, you can buy more shares than your account balance permits. So, if the margin is five times or 5X, you can buy stocks worth INR 50,000 with an investment of INR 10,000.
4. No Overnight Risk - Since day traders close their positions before the market closes, their capital is immune from overnight risks. Hence, no negative news can disrupt their peaceful sleep after the market closes.
5. Sell First - As a day trader, you can also benefit from a bearish market by selling first. If you are certain that a stock's price will decrease further, you can place a sell trade when the price is high and book the profit when the price decreases further.
How Can You Start Your Career as a Day Trader?
To start your career as a day trader, you need a PAN card, Aadhar card, bank statement, and a photograph and use them to open a Demat account and a trading account. While the Demat account is used to store shares and is mandatory under Indian laws, the trading account facilitates easy access to stocks, commodities, currencies, etc. When you deposit money for trading, the amount gets reflected in your trading account. Similarly, you can place a withdrawal request from your trading account to get the profit in your bank account.
You can open either of two types of trading accounts - cash and margin. If you have a cash account, you can buy shares worth the amount available in your trading account. Conversely, if you have a margin account, you can buy more shares than your account balance permits.
So, you know what the meaning of day trading is and how to open an account; discover the tips required to trade efficiently in the following section.
Tips to Trade Efficiently As a Day Trader
The following are the top time-tested strategies to trade like an expert:
1. Consistency is the Key - Day trading is a matter of patience and determination. Quite often, traders lose motivation when they lose a few trades without realising that it takes time to excel in the art of day trading. It is wise to place a stop loss every time you place a buy or sell trade.
2. Devise a Strategy - Brokerage houses like 5paisa regularly publish research reports and recommendations to help you identify solid opportunities for day or positional trading. However, besides the recommendations, you must also devise a day trading strategy to make consistent profits. Some strategies are scalping, momentum trading, arbitrage, high-frequency trading, etc.
3. Invest a Healthy Amount - Capital plays a crucial role in determining the profit margin. If you enter the market with low capital, you may have to take higher risks to get the profit you desire. However, if your capital is high, you can take calculated risks. A high capital also helps you diversify your total investment.
4. Use Leverage Cautiously - Some investors consider leverage as a double-edged sword. While it can maximise your profit, it can also magnify the losses. Hence, treat leverage with caution to minimise your risks.
Day trading can be truly remunerative when you know the trade tricks. An efficient day trader understands volatility like an expert and makes market trends their best friend. Make 5paisa your trusted aide and explore the world of rewarding trading.