Blueprint: How to become a day trader from scratch.
Day trading is one of the most trending topics that is gaining a lot of attention in the financial world. It has become the primary source of income for many people because it is flexible, you don’t need to rely on anyone. All you need is a laptop and an internet connection. But wait! There are still many other things that you need to understand about investing in the market before entering the financial markets are mentioned below:
Understand the markets- before investing in the markets you should learn how the market functions and behaves and pay more importance to the price movements of different stocks, securities, currency pairs, and commodities (gold, crude oil, natural gas, crypto) because if you don’t respect the market then the market won’t respect you. Start from the basics and then practice from demo accounts where they provide you with virtual money, use charting tools to analyze the markets, and put your markings. Don’t rush into the markets only because you see huge profits of traders, take some time to learn and understand the stuff and then enter the game.
Learn technical analysis- let’s make one thing clear if you want to become a day trader the fundamentals won’t work for you because you are not holding your security up to many days or months or years, you have to square off your position within 5 to 6 hours. So to catch those price movements you have to learn about technical analysis which includes candlestick charts, patterns, indicators, oscillators, and many more things. This does not mean that fundamentals are useless in day trading they can be a blessing on the day of any huge news like budget announcement or elections etc. so learn everything before entering the markets.
Develop a strategy according to your trading style- why I say trading style because there are many types of traders in day trading as well, some like to enter the trade and stay in the trade till the market’s closing bell whereas some enter and exit the trade within a few minutes, those are known as scalpers and the method is known as scalping. So according to your style, you can develop your own strategy by using your most reliable indicators and chart patterns. As a beginner you should develop at least 2-3 strategies because the markets are very dynamic in nature it is always better to have some backups with you.
Backtest your strategies- Only developing a strategy is not enough because if you just create and strategy and enter the market you may make profits at first but in the long run the market will kick you out of the game. That is why after developing a strategy you should backtest it for some days till you won’t get at least 75%-80-% of success rate. Once you get a success rate then you are ready.
Arrange sufficient capital- if you are just starting off then you should at least have 5-10k in your Demat account. It is the minimum amount required to start off in the stock markets. Because no one makes profits consistently if one day you hit a loss then you should have enough capital left to trade to recover the loss amount.
Tip: Never ever borrow money for trading.
Because the financial markets are very dynamic and volatile you cannot always expect to make profits and if you make losses from money borrowed from others that feels like a huge burden.
money/risk management- risk management is a must-skill you know if you are entering the markets because if you follow this perfectly you will never blow your account. What is risk management? It does nothing, it just includes the decisions relating to capital to be invested or quantity/lot size to be bought/sold. If you are wondering how this works, then let me explain you with an example:
For example, you have a capital of 100000 & the share price of company XYZ is 500 rs. Lets us take two scenarios for this example
- You don’t know about risk management
- You know risk management
If you don’t know risk management, then you will end up buying 200 quantity of shares of the same XYZ company and if the price goes up by 5 points you will make [200*5]= 1000 rs and if the share price falls by 5 points you will end up losing 1000 rs, on the other hand
If you know risk management, then you will diversify your portfolio like you will buy 100 shares of XYZ company and 100 shares of any other company by maintaining strict stop losses and targets.
Remember if you want to stick to the market for the long run, then risk management is a must needed skill.
These are some additional bonus tips that should follow as a day trader:
Research on the brokers before opening a trading or Demat account- there are many brokers available in the Indian market. Before opening an account using the brokerage calculator available on their website. Select the best broker which matches your requirements.
Use leverage properly- what is leverage? Let us understand with an example:
For example, you have an account size of 100000 and you want to buy shares of XYZ company @500 per share. According to the normal calculation you can only buy 200 shares, but some brokers provide you leverage which is a kind of loan through which you can buy more shares. Let’s say a broker gives you 10 times leverage, which means with an account size of 100000 you can buy 2000 shares [ 100000*10/500].
Note; leverage is only provided for day trading, if you use leverage to buy/sell shares you have to square off before the closing bell.
Don’t fall for tips and calls services- there are scammers who provide free and paid calls services for intraday, don’t fall for that. Do your own analysis and take trades all by yourself. Learn how to invest in the stock market.