The financial markets offer individuals various avenues to generate returns and grow their capital. While some prefer to invest passively in various asset classes and stay invested for the long term, others buy and sell assets daily to profit from market movements during a trading session. They are called day traders. In this article, we will learn who a day trader is and how you can start day trading in India.
A day trader is one who buys and sells securities such as stocks, currencies, and commodities within the same day. In India, day traders also trade in derivatives such as futures and options.
A day trader enters into a position during a trading session and exits the position before the market closes for the day. The primary objective of a day trader is to capitalise on the price movements of an asset during a trading session.
Let’s look at some of the characteristics of a day trader -
A day trader approaches the markets with the aim of entering and exiting a position within a day to earn a profit. A day trader does not carry a position overnight and squares off all positions before the trading session concludes.
Day traders often use leverage to execute large-volume trades. Leverage allows a trader to borrow funds and trade large quantities of an asset to increase the magnitude of gains.
Day trading can carry significant risk, especially while using leverage. The risk associated with day trading increases during volatile trading sessions, highlighting the importance of solid risk management principles. The aforementioned risk can be controlled by including stop-loss orders and having a predefined risk-to-reward ratio.
Technical analysis is one of the key components of day trading and is more suitable for day trading than fundamental analysis. A day trader studies the price action and makes use of various indicators to make trading decisions. Some of the common indicators used by day traders include Bollinger Bands, Moving Average Convergence Divergence (MACD), Relative Strength Index and Moving Averages.
A day trader typically makes quick decisions. Some day traders enter and exit trades very quickly by making snap decisions. Day traders also consider factors such as any breaking news, technical setups or price action events when making rapid decisions.
A trader's psychology is very important while day trading. A day trader has a higher risk appetite and possesses qualities such as patience and discipline. Day traders need to have a grip on emotions such as fear and greed.
There are multiple strategies and approaches while day trading. However, there are three common day trading strategies:
Scalping is a day trading strategy wherein a trade lasts for a few seconds to a couple of minutes. Traders aim to capitalise on extremely short-term price movements and execute trades with large quantities.
Momentum trading involves profiting by capturing the market’s momentum. This involves identifying trends and reversals to earn a profit.
Breakout trading is a common day trading strategy in which traders identify a security breaking a support or resistance level and then capitalising on the following momentum.
If you’re considering day trading, it is important to know the risks and challenges associated with it.
In India, the Securities and Exchange Board of India (SEBI) is the apex body that regulates the markets. The primary goal of SEBI is to promote transparency and protect investors’ interests.
Since day trading is risky and can lead to significant losses, SEBI has issued several guidelines to protect investors. SEBI keeps a close watch on high-risk instruments such as futures & options (F&O) and issues guidelines on aspects such as margin requirements and lot sizes.
Day traders should be aware of any rules and regulations regarding intraday trading. These include whether the asset is regulated by SEBI and the tax implications around intraday trading.
In India, profits generated from intraday equity trading is considered as speculative business income and subject to the taxation as per applicable slab rate.
Here’s how you can get started on your day trading journey -
Day trading requires you to understand various aspects such as market mechanics, order types (stop-loss, market, limit) and trading platforms. Rather than risking any real money, traders could consider using a demo account to trade with virtual currency to grasp the trading process better.
The next step is to open a Demat and trading account with a broker registered with SEBI. Carefully assess the various features, brokerage fees, tools and services offered by the brokers. Choosing the right broker can help you trade in a cost-efficient and safe manner.
Deposit sufficient funds that can allow you to trade the desired securities. Understand the margin requirements and ensure that you have an additional amount set aside for liquidity purposes.
Rather entering into random trades and booking losses, it is important to formulate a trading strategy to define your entry and exit points. Create conditions on when to enter and exit a trade.
Managing your risk is one of the key pillars of intraday trading. Keep your position sizing in check as per your risk appetite and always have a stop-loss order in place to prevent capital erosion. Stay disciplined and avoid trading impulsively.
Although day trading can be challenging, avoiding certain common mistakes and following some tips can help you become successful: