Why people lose money in intraday trading?
Intraday trading is the buying and selling of the stock (or selling and buying) on the same day using an online trading app. When you trade intraday, the net position at the end of the day is zero, so there is no delivery. That is a unique feature of the rolling settlement system in India.It has opened up the floodgates for intraday trading as the trader can get leverage and also rapid churn. However, that is easier said than done and traders often complain that they lose money in intraday trading. These losses arise because traders do not maintain some basic ground rules. Here is why intraday traders end up losing money.
6 reasons why intraday traders could end up on the wrong side
- You trade like a cowboy and shoot from the hip. There is a popular misconception that trading intraday is about being macho and taking big risks. If you stake all your capital in a single trade, you are obviously not going to survive for too long. In reality, trading intraday is a lot more about discipline than even delivery buying. When you buy for delivery, you pay the amount and hence you can afford to wait. In contrast, intraday trading is leveraged and hence risk management becomes the key.
- Trading without capital loss limits is the second mistake most intraday traders make. Capital loss limits must be placed at various levels. You must clearly define how much you are willing to lose in a day, in a week and overall. For example, if your capital is Rs2 lakhs, you can set a 5% maximum loss target for a day and 25% as overall loss. At that point you must stop trading and revisit your strategy.
- Not being passionate about stop losses and profit targets is a common reason for losses. When you trade intraday, you need insurance both ways. You need protection from big losses and from losing profits. This can be best addressed through stop losses and profit targets. Intraday traders who do not set such limits at the time of order placement are more likely to lose money.
- Not being the decision maker for all your trades is a common reason for losses. What does this mean? Quite often, traders rely on tips and ideas from the broking fraternity for trading. That does not work in the case of intraday trading. You need to learn how to interpret charts and news flow yourself. There is no rocket science in reading charts and you can do that with a little bit of extra effort. Trading intraday is extremely personalized and off-the-shelf solutions are bound to disappoint.
- Trying to outsmart the market is a cardinal blunder that a lot of intraday traders commit. As an intraday trader, you are different from a long term investor. A long term investor with a Buffettian tilt can afford to take contrarian calls on the market. As an intraday trader, you are trading within the limited window of 6 hours. The best way is to read the market trend and play by the trend. Trend is your friend as an intraday trader. In the long run, the market will always outsmart you!
- Not adapting to the changing environment is a common reason why intraday trades fail. We call it the giraffe syndrome to represent the way its neck adapted to vanishing grasslands. Market undertones keep shifting continuously. Volatility could increase, midcaps could become more attractive, sectors could go out of favour and all these have an impact on your intraday trading strategy. It depends on how best you adapt!