A discount broker will go a long way in keeping the charges low for intraday trades. It ensures more money in your pocket. Avoiding loss in intraday trading is a function of market psychology, knowledge, position sizing, and stop loss.
All of the 3 needs to be combined to avoid losses. However, losses cannot be avoided entirely, and one can only limit them. With this thought process in mind, let us go through a list of points, which will help to manage intraday trading risk considerably.
1. Rely on position sizing
Position sizing plays an important role in limiting losses. The concept means that you are willing to loose only a certain amount during the day. If that hits, you will not trade for the entire day. E.g I have a Rs 500 per day limit.
Based on this, I determine how many stocks to buy. It is simply, Risk per day i.e. Rs 500/ (Entry price – Stop loss ) for long positions. Reverse the denominator for short positions.
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2. Stop losses are life savers
Now, position size is supported by a stop loss, wherein you put a stop loss price during trade progress. There are different kinds of stop loss techniques.
Single price stop loss is very well known. However, it often leads to spillage as during heavy momentum days the stop loss level will be breached slightly. Thus always have a stop loss range in mind and don’t expect that price will hit at the exact point.
Due to the above limitations, traders prefer Limit stop loss orders. So a Limit stop loss order requires two prices. The first one is the normal stop loss price and second is the limit price. The advantage of this order is that the trader will receive the most favorable price.
Other kinds of stop losses include Time stop loss ( exit after certain time if price does not move ), Pyramiding ( increase stop loss levels, as price keeps increasing, so as to lock profits ).
3. Mantra of booking small returns
Booking small returns across multiple trades is the key to remain profitable. One cannot have large target intraday due to the time factor. Recognizing this, the trade can be broken into several parts and targets set accordingly.
Sticking to the plan will ensure large profits over time. A discount broker will help minimize the charges.
4. Trend is your friend, always
Trend is you friend. Hence, it is advisable to never trade against the market. The index stocks will most probably follow index movements. Knowing the prevalent trend, will help with the tailwinds.
However, one should not apply this point strictly. One need to combine the stock and index trend along with important support and resistance levels.
5. Revenge trading will dent capital
Revenge trading is a strict no for intraday trades. This point is also related to overtrading. Beyond a certain loss or profit cutoff, it is always better to shut down your system and engage in some other activity.
The urge for revenge trading kicks in when the earlier trade did not go as expected and ended in a loss. Thereafter there is a strong urge to recover the earlier loss quickly within the same day. However, this is only wishful thinking of the novices. One needs to be realistic and learn to take losses as well.
6. Tracking news during market hours may lead to mistakes
Don’t track news and experts on television during the trade. One should be able to analyze the market on their own and have that much needed conviction. Hence, it is always better to learn trading before practicing intraday trades as relying only on tips may be disastrous.
Be ready to change your views as per the price action on charts.
There is no point holding on to a view till eternity. The above suggested measures will go a long way to help avoid or minimize the intraday losses.