Fundamentals Of Day Trading
CONTENTS
UNDERSTANDING THE TERM ‘DAY TRADING’
DIFFERENT STYLES OF DAY TRADING
DIFFERENT TYPES OF MARKETS
SELECTING THE RIGHT MARKET
THE NATIONAL STOCK EXCHANGE OF INDIA
THE BOMBAY STOCK EXCHANGE OF INDIA
THE MULTI-COMMODITY EXCHANGE OF INDIA
EVALUATING YOUR STOCK BROKER
DAY-TRADING AND EMOTIONS
FEAR AND GREED AFFECTING DAY TRADING
PATIENCE AND DISCIPLINE AFFECTING DAY TRADING
PREPARING FOR THE INEVITABLE – LOSSES
WIN TO LOSS RATIO
RISK FOR DAY TRADERS
TRADING WITH A SMALL ACCOUNT
UNDERSTANDING THE TERM DAY TRADING
Day trading (and trading in general) is the buying and selling of various financial
instruments, such as futures, options, currencies, and stocks, with the goal of making a
profit from the difference between the buying price and the selling price. Day trading
differs slightly from other styles of trading in that positions are rarely (if ever) held
overnight or when the market being traded is closed.
Day trading was originally only available to financial companies (such as banks), because
only they had access to the exchanges and market data. But with recent technology such as
the Internet, individual traders now have direct access to the same exchanges and market
data, and can make the same trades at very low cost.
DIFFERENT STYLES OF DAY TRADING
There are several different styles of day trading, suited to different day trader personalities.
These styles range from short term trading such as scalping where positions are only held
for a few seconds or minutes to longer term swing and position trading where a position
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may be held throughout the trading day. Most day trading systems have a lot of flexibility,
and can have open positions for anywhere from a few minutes to a few hours, depending
upon how the trade is doing (whether it is in profit). Some day traders will trade multiple
styles, but most traders will choose a single style and only take that type of trade.
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Day trading consists of different types of trades such as trend trades, counter-trend trades,
and ranging trades. Trend trades are trades in the direction of the current price movement
(i.e. buying if the price is moving up), and counter-trend trades are trades against the
direction of the current price movement (i.e. selling if the price is moving up). Ranging
trades are trades that go back and forth between two prices, and are used when the market
is moving sideways. Most day traders will choose a single type of trade, but some traders
will take different types, and choose which one to trade depending upon the current
condition of the market.
In addition to the style and type of day trading, there are other variances between day
traders. Some day traders like to make many trades throughout the trading day, while
others prefer to wait for what they consider the best conditions for their trade, and perhaps
only make one trade per day. However many trades are made, the trading process that is
used, and the desired goal of making a profit, are the same.
DIFFERENT TYPES OF MARKETS
There are many different financial instruments, or markets, that can be day traded, and they
are offered by various exchanges throughout the world. The main types of day trading
markets are futures, options, currencies, commodities and stock markets. Within these
types, there are groups of markets based on stock indexes (such as Bombay Stock Exchange,
and the NSE), currency exchange rates (such as the Euro to US Dollar exchange rate), and
commodities (such as gold, and oil). Day traders can have access to all of the exchanges and
their markets via direct access brokers, so called because they offer direct access to the
exchange, which provides faster trade execution at lower cost.
SELECTING THE RIGHT MARKET
Whichever markets you are trading, it is important to know what the market is based upon
(e.g. stocks, currencies, or commodities), what the contract specifications are, and when
the market is open for trading. This category profiles some of the most popular day trading
markets in India, The National Stock Exchange (NSE), The Bombay Stock Exchange (BSE),
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and The Multi-Commodity Exchange (MCX).
THE NATIONAL STOCK EXCHANGE OF INDIA (NSE)
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The NIFTY market is based upon the Nifty stock index, which is the primary stock index of
the National Stock Exchange (NSE) in India. The Nifty stock index consists of fifty
companies that represent the diversity of the stocks that are traded on the NSE. The Nifty
stock index is calculated in real time, and the NIFTY futures market is traded on the NEAT
electronic trading system from 9:00 AM to 3:30 PM Indian Time.
The National Stock Exchange (NSE) is India's leading stock exchange covering various cities
and towns across the country. NSE was set up by leading institutions to provide a modern
and fully automated screen-based trading system with national reach. The Exchange has
brought about unparalleled transparency, speed & efficiency, safety and market integrity.
NSE has played a catalytic role in reforming the Indian securities market in terms of
microstructure, market practices and trading volumes. The market today uses state-of-art
information technology to provide an efficient and transparent trading, clearing and
settlement mechanism, and has witnessed several innovations in products & services viz.
demutualisation of stock exchange governance, screen based trading, compression of
settlement cycles, dematerialisation and electronic transfer of securities, securities lending
and borrowing, professionalisation of trading members, fine-tuned risk management
systems, emergence of clearing corporations to assume counterparty risks, market of debt
and derivative instruments and intensive use of information technology.
THE BOMBAY STOCK EXCHANGE OF INDIA (BSE)
Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage of over 133
years of existence. What is now popularly known as BSE was established as "The Native
Share & Stock Brokers' Association" in 1875.
BSE is the first stock exchange in the country which obtained permanent recognition (in
1956) from the Government of India under the Securities Contracts (Regulation) Act (SCRA)
1956. BSE's pivotal and pre-eminent role in the development of the Indian capital market is
widely recognised.
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It migrated from the open out-cry system to an online screen-based order driven trading
system. Over the past 133 years, BSE has facilitated the growth of the Indian corporate
sector by providing it with cost and time efficient access to resources. There is perhaps no
major corporate in India which has not sourced BSE's services in raising resources from the
market.
Today, BSE is the world's number 1 exchange in terms of the number of listed companies
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and the world's 5th in handling of transactions through its electronic trading system. The
companies listed on BSE command a total market capitalization of USD Trillion 1.06 as of
July, 2009. BSE reaches to over 400 cities and town nation-wide and has around 4,937 listed
companies, with over 7745 scripts being traded as on 31st July 09.
The BSE Index, SENSEX, is India's first and most popular stock market benchmark index.
Sensex is tracked worldwide. It constitutes 30 stocks representing 12 major sectors. The
SENSEX is constructed on a 'free-float' methodology, and is sensitive to market movements
and market realities. Apart from the SENSEX, BSE offers 23 indices, including 13 sector
indices. It has entered into an index cooperation agreement with Deutsche Börse and
Singapore Stock Exchange. These agreements have made SENSEX and other BSE indices
available to investors across the globe. Moreover, Barclays Global Investors (BGI), at Hong
Kong, the global leader in ETFs through its iShares® brand, has created the exchange traded
fund (ETF) called 'iShares® BSE SENSEX India Tracker' which tracks the SENSEX. The ETF
enables investors in Hong Kong to take an exposure to the Indian equity market.
The exchange traded funds (ETF) on SENSEX, called "SPIcE" and Kotak SENSEX ETF are
listed on BSE. They bring to the investors a trading tool that can be easily used for the
purposes of investment, trading, hedging and arbitrage. These ETFs allow small investors to
take a long-term view of the market.
BSE provides an efficient and transparent market for trading in equity, debt instruments
and derivatives. It has always been at par with the international standards. The systems and
processes are designed to safeguard market integrity and enhance transparency in
operations. BSE is the first exchange in India and the second in the world to obtain an ISO
9001:2000 certification. It is also the first exchange in the country and second in the world
to receive Information Security Management System Standard BS 7799-2-2002 certification
for its BSE On-line Trading System (BOLT).
BSE continues to innovate. In 2006, it became the first national level stock exchange to
launch its website in Gujarati and Hindi and now Marathi to reach out to a larger number
of investors. It has successfully launched a reporting platform for corporate bonds in India
christened the ICDM or Indian Corporate Debt Market and a unique ticker-cum-screen
aptly named 'BSE Broadcast' which enables information dissemination to the common man
on the street.
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THE MULTI-COMMODITY EXCHANGE (MCX)
Headquartered in the financial capital of India, Mumbai, Multi Commodity Exchange of
India is a demutualised nationwide electronic commodity futures exchange set up by
Financial Technologies (India) Ltd. with permanent recognition from Government of India
for facilitating online trading, clearing & settlement operations for futures market across
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the country. The exchange started operations in November 2003.
MCX offers futures trading in more than 40 commodities from various market segments
including bullion, energy, ferrous and non-ferrous metals, oil and oil seeds, cereal, pulses,
plantation, spices, plastic and fibre. The exchange strives to be at the forefront of
developments in the commodities futures industry and has forged strategic alliances with
various leading International Exchanges, including Tokyo Commodity Exchange, London
Metal Exchange, New York Mercantile Exchange, Bursa Malaysia Derivatives, Berhad and
others.
EVALUATING YOUR STOCK BROKER
Many investors enter into a relationship with their brokers with little or no knowledge
about the brokers' background, such as time in the business, expertise or ability to manage
money. Investors also are often in the dark when it comes to particulars of the firms they
are dealing with.
This is a mistake.
Well-informed investors who know the lay of the land and who ask the right questions will
be able to communicate their needs to a broker more effectively. Perhaps more
importantly, they will also be able to ensure that they aren't being taken advantage of,
particularly when it comes to commission charges.
One must be very careful when selecting the right broker. It’s like selecting a right doctor,
a right lawyer, or a right school. Remember, you will be using your broker’s platform to
execute your trades and its very important that you know their charges to ensure that you
are trading with sufficient margin to gain profits on your trades.
DAY TRADING AND EMOTIONS
The idea of making a living as a day trader appeals to a large number of people in India, but
not everybody has a personality suitable for day trading. Even people that are successful in
other fields (even related fields), often find that they are not compatible with day trading.
Day trading is a flexible profession (meaning that it can be adapted to suit different styles),
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but there are a few qualities that all day traders need to have in their personalities, in order
to be successful (profitable), and avoid becoming a nervous wreck in the process.
PATIENCE
When non traders imagine day traders, many people think of traders in a trading pit,
wearing brightly colored shirts, shouting and waving their arms about. While this may have
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been true once, it is no longer an accurate image of day trading. Modern day trading is
performed by sitting quietly in front of a computer, waiting anywhere from a few minutes,
to several hours, or even days, for the next trade to come along. Being able to wait patiently
is a necessity, otherwise you will find yourself taking trades that are not part of your
trading system (known as making up a trade), and most likely losing money on them.
Waiting patiently does not necessarily mean doing nothing, and there are many things that
you can do while you are waiting for your next trade. Some day traders join live trading
rooms where they can interact with other traders, some traders play computer games and
watch movies, and many day traders eat their meals while they are trading (breakfast often
coincides nicely with the market open).
DECISIVENESS
Deciding when to enter and exit trades is one of the most basic functions of a day trader,
and it is important that these decisions are made as efficiently as possible. Being decisive is
vital to successful day trading, otherwise you will only sit and watch trades that you should
have actually taken. Being decisive does not mean being rash, and taking trades that you are
not sure about, but it does mean acting promptly when a trade does come along. A common
pitfall that many beginning day traders come across is seeing a trade occurring, but
hesitating and waiting for the trade to start moving into profit before entering (waiting for
confirmation that the trade is going to be a winning trade before they enter it). This always
results in an entry price that is not as good as it would have been with a prompt entry, and
can turn a winning trade into a losing trade
CALMNESS
Remaining calm during trading is one of the most important personality traits for a day
trader, but it is also one of the most difficult to obtain and practice. As humans, the natural
reactions to a winning trade are excitement and joy, and the natural reactions to a losing
trade are panic and sadness, but day traders need to control these emotions, otherwise they
will adversely affect their trading decisions (particularly the negative emotions). For
example, the panic that occurs after a losing trade might make you take a new trade almost
immediately in an attempt to make the money back, even though there was no trade
according to your trading system.
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TRADING IN SIMULATION
Trading in simulation is a good way to practice your patience, decisiveness, and calmness
during trading, without risking any real money. After many hours, days, or weeks of
simulation, you will have a good idea of how your personality and your emotions will affect
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your day trading, but even then, there will still be an emotional response when you start
trading live.
FEAR AND GREED AFFECTING DAY TRADING
FEAR
Fear is the emotion that stops us from doing things that might be too risky. In the right
quantity, fear is obviously an emotion that we need, but when fear becomes too great we
can be prevented from doing things that might be necessary. In day trading, the main fear a
trader has is that they are going to make a losing trade and lose money. This is a rational
fear as no trader wants to lose money, but it is irrational if it prevents the trader from
taking any trades in the first place. As an example, a trader might make a losing trade, and
then be too fearful to make the next trade, which of course turns out to be a winning trade,
and would have covered the previous loss. By letting the fear take control, the trader now
has a net loss, even though a winning trade was available. The emotion of fear can be
overcome by acknowledging that all day traders have losing trades occasionally, but as long
as they are less frequent than the winning trades, there is nothing to be afraid of as there
will still be a net profit.
GREED
Greed is the opposite emotion to fear, in that it is the emotion that makes us do things we
would not normally do. The right amount of greed is necessary because it gives us the
motivation to work at something, but when we are too greedy we will start doing things
even when we know that we should not. In day trading, greed can make traders make
random trades, or hold on to positions longer than their trading system dictates. For
example, if a trader is watching a market moving strongly upwards, the trader might be
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tempted to make a trade even though their trading system says not to. The trader has
allowed the greed to take control, and more often than not in this scenario, they will be
buying right at the end of the move and will have a losing trade. The emotion of greed can
be overcome by testing and then trusting in your trading system, and knowing that if you
follow it correctly, it will make a profit without taking every potential trade.
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PATIENCE AND DISCIPLINE AFFECTING DAY TRADING
Professional traders know that their emotions are going to affect their trading whether they
like it or not. As a result, they develop personalities that allow them to overcome their
emotions and trade profitably. Two of the most important personality traits are patience
and discipline, because they allow you to handle one of the most difficult aspects of trading.
MAKING UP TRADES
Possibly the most emotional time for a trader is when their profit / loss is negative, and they
are waiting for their next trade to come along. During this time they will be impatient and
anxious, and they will be desperate to take their next trade in order to make back the
money that they have lost. Most new traders (and also many experienced traders) will start
taking trades that are not part of their trading system (known as making up a trade). As
soon as this happens, their loss will increase, and will continue to do so until they realize
what they are doing and correct their behavior.
ACCEPTING YOUR EMOTIONS
The solution to emotional trading is not to try and remove or control your emotions (good
luck if you decide to try), but to develop character traits that allow you to control your
response to your emotions. By developing a personality that counteracts your emotions you
will be able to continue making logical decisions, even when your heart is pounding and
sweat is streaming down your face (maybe this is a slight exaggeration).
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Patience and discipline are vital personality traits for professional traders. Being patient
allows you to wait for your next trade regardless of your current profit / loss, and being
disciplined allows you to take only trades that are part of your trading system (not making
up a trade). For some traders, the thought of losing money is enough to make them
instantly patient and disciplined, but for others, the emotions are too strong, and they need
to cultivate their patience and discipline.
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TRADING LOG
One method of learning how to be patient and discipline is to keep a detailed log of every
trade that you take. At the end of the day (or week, or month), replay every trade, and
compare the replayed trades to your trading log. If there are any differences, you should be
able to determine what caused them, and hopefully know what you need to avoid the next
time.
Another method of becoming patient and disciplined is to have absolute confidence in your
trading system. Knowing that your trading system will make money over the long term can
be enough to overcome the negative emotions that occur when you are experiencing a
negative profit / loss. The only way to have confidence in your trading system is to test the
system thoroughly. If you have tested your trading system over a significant length of time,
and it is consistently profitable, there is no reason to question that it will continue to be
profitable.
PREPARING FOR THE INEVITABLE – LOSSES
Even using a good trading system and good trading techniques, every trader will
experience losses. These losses may be very large losses. And these large losses can deplete
your trading account and serve as a source of stress for many traders. The extent of your
losses will depend on many factors such as your trading system, your trade, other market
factors, and, very importantly, how you handle the stress of losing money on a trade.
Most traders just consider losses as a business expense that one will incur from time to time.
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We should never ignore them, but we can control them. SunnyProfits.com founder, Sunny
Shah, preached about the importance of cutting losses short when he said:
Whether you’re a new or experienced investor, the hardest lesson to learn is that you’re
simply not going to be right all the time. And if you don’t cut every loss quickly, sooner or
later you’ll suffer some very large losses.
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That’s why losses are called “the inevitable.” But losses can be minimized. In fact, they
should be if you want to continue trading! Stress related to these losses can also be
minimized, particularly if you want to remain happy, healthy, and trading.
You’ll find two stress-busting measures in the next section that can help any trader
suffering stress from a major loss.
TAKE A DE-TOX DAY
Go “cold turkey” from trading for a day or even a week. During this detox day, take a break
from all thoughts of trading, entering or exiting a trade, and even watching the market.
After taking your detox period, you can return to trading.
It might be difficult, but remember that every trader has to “get back in the saddle” again.
Staying away from trading for too long makes it very difficult to start trading again. I know
one trader who left the market for two years after losing almost Rs. 5,00,000 on a single,
foolishly-entered trade. He came back, but his skills were diminished and it was very
difficult to overcome his fear. Take your de-tox day then come back to trading.
LEARN FROM THE TRADE
Analyze what happened to cause your losses. Consider how your trading system worked
and how you worked in it. Also, consider how you could have performed better in the
trade. Do not second guess the decisions that you made or that your trading system
suggested. Write down three lessons you learned from this trade. The loss then becomes
tuition for your trading education rather than just a loss.
ONE FINAL WORD
Remember that even the most successful traders experience losses. Yes, this applies to every
trader. There are no exceptions to this rule. You must let go of the losing trade and move on
to the next trade. But always remember the lessons you learned.
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WIN TO LOSS RATIO
RISK MANAGEMENT
Risk management is the process of managing (read as reducing) the risk of a trade so that it
is more likely to be profitable. Professional traders know that risk management is one of the
most important aspects of trading, but it is often overlooked by new traders to their
detriment (e.g. their blown up trading account).
The win to loss ratio is one of the risk management ratios that are used to determine if a
trading system is likely to be consistently profitable. Specifically, the win to loss ratio is a
comparison of how many profitable trades to how many losing trades, a trading system or
trader makes. For example, a win to loss ratio of 20:10 would indicate that a trader makes 20
profitable trades for every 10 losing trades. This ratio could also be given as 2:1, or as 200%
(calculated as ((20 / 10) * 100) = 200), meaning that there are twice as many profitable
trades as there are losing trades.
Higher win to loss ratios mean that a trading system or trader is making more profitable
trades than losing trades. If this is combined with a low risk to reward ratio, a trader is
more likely to be consistently profitable. For example, a win to loss ratio of 200% means that
a trader is making two profitable trades for every one losing trade. With a risk to reward
ratio of 50% (i.e. the risk is half of the potential profit), a trader would make four times
more profit than loss (i.e. they would keep 75% of their profit).
The win to loss ratio is often used in combination with some of the other risk management
ratios, such as the risk to reward ratio (which compares the amount of profit and loss), and
the break even percentage (which gives the number of winning trades that are required to
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break even). By correctly calculating and comparing the risk management ratios, a trader
can see if their trading system has the potential to be profitable.
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RISK FOR DAY TRADERS
WHAT IS RISK?
Risk is exposure. In Forex trading, risk refers to exposure to the price changes of a
currency pair. Often, risk makes people wary of trading stocks, commodities, or currencies.
It is true that risk is an integral part of every trade. In other words, there is no such thing as
a “risk free” trade. If any broker says that his investment or trading system is risk free, you
may be talking to an unscrupulous dealer. This is a warning sign of which all traders should
be aware.
Risk is an aspect of every trade and of every trader’s life. Even such successful investors like
Warren Buffett and William O’Neill have admitted that they have lost money in the market.
Every trader will lose money trading currencies. The goal, though, is to make more winning
trades than losing trades, make more money than you lose, and to manage your level of risk.
UNDERSTANDING RISK
Understanding risk is the first step towards managing it. The Forex market carries a
uniquely high level of risk. This high level of risk comes from the high amount of leverage
available to Forex traders. The currency market allows people to purchase currencies at a
100 to 1 or even 200:1 ratio. No other financial market allows this amount of leverage. Many
traders are attracted to Forex for this reason. But it can be a double-edged sword. The faster
money can be made, the faster money can be lost.
LEVELS OF RISK
Different kinds of accounts carry different levels of risk. The margin account is the riskiest
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type because the trader has access to nearly unlimited funds. In other words, the trader is
not limited to the cash available in his or her account. The trader using a margin account
can end up owing additional funds if the currency pair makes a strong price movement
against him. And, yes, this does happen to traders, which is why stop loss orders are always
recommended.
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A cash account carries much less risk because the trader is limited to trading only the
amount of cash in the account. However, the risk is that the trader will not have sufficient
funds available to enter the desired trades.
THE MARGIN ACCOUNT
To trade on the margin , a trader must have a margin account. A margin account is a special
type of account that traders can have with a brokerage firm or bank. Margin is the required
amount of money that a trader must deposit to collateralize (or fund) a Forex position.
Therefore, margin changes constantly as the price of the currency pair changes. If the
currency pair moves in the trader’s favor, the margin requirement will be lower. However,
if the currency pair moves in an unfavorable direction, the trader may need to deposit
additional funds to keep the position adequately funded. This is known as a margin call .
RISK REWARD RATIO
A Risk-Reward Ratio is a calculation that shows the maximum amount of risk and
maximum reward on a particular trade. It is one of the best factors in deciding whether to
enter a particular trade. Every trader should know how much he or she is willing to lose
and how much he or she is looking to gain on each trade. The risk-reward ratio should be at
least 1:2. A higher ratio (1:4 or 1:6) is even better. If the Risk-Reward Ratio does not meet
the minimum requirement, the trader should not enter this trade. The Risk-Reward Ratio is
an excellent risk management tool and should be used by every trader on every trade.
MANAGING RISK
Although risk can cause anxiety for traders, it can also be managed. Risk management tools
and techniques are essential for every trader to employ. A few ways to manage your risk in
trading Forex are:
Determine Risk-Reward Ratio. Always know the amount of your exposure.
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Use stop loss orders.
Never maximize the available margin. Keep margin use to a minimum, preferably 10
to 20 percent on each trade. Decide carefully whether to use any margin at all.
Avoid using margin in uncertain markets.
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Trading on the margin can be both risky and profitable. Understanding your risk on each
trade and knowing your psychological level of acceptable risk are important ways to
protect your account and yourself.
TRADING WITH A SMALL ACCOUNT
Every trader wants to trade a well funded trading account (i.e. a Rs. 1,00,000 account), but
very few of us actually get to do this. Most traders are stuck with trading relatively small
accounts (i.e. just covering the required margin). Trading a small account requires very
strict risk management (i.e. money management) because there is no buffer against mistakes
or any unexpected losses. For example, if a trading account only covers its required margin
by Rs. 5000, and it takes a Rs. 6000 loss, the account will become untradeable until
additional money is deposited.
TRADING A SMALL ACCOUNT
Trading a small (or under capitalized) account is much more difficult than trading a large
account. Large accounts are buffered against mistakes, unexpected losing streaks, and
sometimes even bad traders, but small accounts have no such buffer. Large accounts can be
used to trade any available market, but small accounts can only be used to trade markets
with low margin requirements and small tick values. Large accounts also allow more
flexible trading (e.g. multiple contracts), whereas small accounts are very limited in the
trade management strategies that they can use.
In addition, trading a small account has psychological issues that make it even harder to
trade the account well. For example, when a trader knows that they can only afford a single
losing trade before their account becomes untradeable (because it will no longer cover its
required margin), the pressure to make a profitable trade is enormous. If the trader handles
the pressure well, this might not be a problem. However, even the best traders have losing
trades, and there is nothing that can be done to avoid losing trades, so this is not something
that the trader has any control over, which adds to the psychological stress.
ADVICE FOR SMALL ACCOUNTS
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With all of the disadvantages, it appears as though it is not possible to trade a small account
profitably. This is not the case, and small accounts are traded profitably by many traders
(including professional traders). The following advice is provided from the perspective of
under capitalized accounts, but the advice actually applies to all trading accounts (even the
Rs. 1,00,000 accounts).
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Trade Using Leverage - Trading using leverage allows small account traders to trade
markets that they cannot trade using cash. For example, trading individual stocks
directly requires approximately 25% to 30% of the trade's value in cash (assuming a
typical margin requirement). However, trading the same underlying stock using the
options or warrants markets (both highly leveraged markets), only requires
approximately 15% of the trade's value in cash. Note that leverage should not be used to
increase the trade's size (i.e. the number of shares), but should only be used to reduce the
trade's margin requirements.
Trade Conservatively - Traders with well funded accounts have the luxury of making
trades with high risk (e.g. large stop losses relative to their targets). Trader with
small accounts must be more cautious, and make sure that their risk to reward ratio,
and their win to loss ratio are being calculated and used correctly.
Adhere to the One Percent Risk Rule - Trading in accordance with the one percent
risk rule provides a small account with the same buffer (against mistakes,
unexpected losses, etc.) as a large account. Many professional traders abide by the
one percent risk rule regardless of the size of their trading accounts, because it is a
very effective risk management technique.
Some traders adamantly state that under capitalized trading accounts cannot be traded
successfully. This is not true. Small trading accounts may be more difficult to trade
successfully, but if they are traded correctly, there is no reason why small trading accounts
cannot be profitable.
By controlling the stress that is often associated with under capitalization, focusing on risk
management, and correctly applying their risk management techniques (especially the one
percent risk rule), small account traders can make a good living from their trading, and
may be able to turn their small account into a large account.
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