Day-trading is fraught with risk, no doubt, but can't it serve as a tool for education in trading? The key is to trade in miniscule lots, review the results and iron out wrinkles in strategy and trading personality. That is, to focus on intra-day trading as a learning process and not as a money-spinning venture.
When I started trading intra-day, I was naive, clueless and irrationally optimistic and lost even over Rs.5000 on a lot of 100 shares in a day. At that time the minimum size of any buy or sell I made was 100 shares. I burned my fingers, scorched my brains and singed my nerves trading intra-day. I hoped and agonised in liberal measure.
I saw quite a few people start out as day traders, lose money in no small measure, chase the losses, take still greater stakes, opt for F&O as safer bets, and end up washed out. I was often tempted to throw in the towel when day after day, with hours of homework and scant sleep, I would still end up a four-figure loser at the end of the day's trading. Every evening was time for an agonising psychoanalysis of myself.
The losses made me imbibe the words of legendary traders and etch it in stone within me. I started setting realistic, time-bound targets such as that I would limit my losses to a specified percentage, etc (laugh). And then, months later, I found that I was losing less money. Also I was being less tense while trading.
Starting October, 2005, after months of trading off the tape, I started trading using intra-day charts. From then till the end of December, 2005, I traded the Capital market and Nifty Futures (Futures for the first time) without carrying over any trade. Trading with intra-day charts for the first time, I was experimenting with tools, timeframes and strategies. I had an unedifying win:loss ratio of 1:4. But on a trading volume of nearly 200 lakhs I ended up with a loss of a little over Rs.100. Above all, I was never on the edge, chewing my nails away ( except when tackling increased volatility in Nifty Futures, something which I have learnt to live with since).
The reason why I survived was nothing, and nothing but money management and discipline. I took positions ranging from as low as Rs.6000 to over a lakh. I never entered any trade without estimating risk and determining stop-loss levels. I rigorously implemented stop-losses and exits, never hoping and wavering. Sometimes I was guilty of chasing a trade or failing to pull the trigger, though.
If I had tried to accquire the required discipline using swing or position trading I doubt if I would have lasted given the drawdown that could be quite large (more so if I were to be hooked by the fascination of leverage that F&O holds), much, much more than what one would lose trading small positions intra-day. Also, the higher frequency of trades in day-trading helped. It helped me learn to trade to plan with little anxiety, though at times I would feel discouraged by a string of losses.
Besides, being a position trader in the kind of bull market that we have had since March, 2003 would have fetched money in generous measure. Many, without the faintest idea about the markets have made potfuls of money in the past two years. Succeeding in such an environment would have lulled one into complacency and a belief of having made it as a trader. But would it be true? Wouldn't losses and disillusionment be just half a major cycle away?
I write this to suggest that day-trading is not a bad idea if one were to use it as a process to learn, to know the flaws inherent in one's personality and thinking, and to discipline oneself. And to trade small positions till one achieves targets set in the spirit, "... One step enough for me" (Light of Asia). But, using day-trading as a "get quick rich" instrument is the surest way to financial ruin. Rightly used, day-trading can be a wonderful way to learn.
Tailpiece:
My target for the next half-year is to try to better my win:loss ratio from 1:4 to 2:3. If I succeed, it would mean a major breakthrough for me, and quite a bit of money too. It seems so near, but could be a long way off, akin to the tale of Tantalus. I may breast the tape or fade out. I'll wait and watch. Meanwhile I am working on strategies for swing trading too (not more than 3 to 4 trades a month) for bread and butter, for now I am reasonably confident that I can plan a trade and trade the plan, all without losing sleep. "Plan your trade and trade your plan" sounds pithy and easy, but is damn difficult to follow. But with persistence, one can definitely learn to.
