People in full-time jobs should especially avoid intraday trading as it results in loss of focus and affects performance.
A recent study by the Securities and Exchange Board of India covering 7 million individual investors found that 71 per cent of those engaged in intraday trading in the equity cash segment lost money.
Their average loss stood at Rs 5,371.
Reasons for losses
Gauging market sentiment is difficult: Intraday stock price fluctuations are driven by changing sentiments.
Most intraday traders place bets based on guesswork regarding which way sentiments will drive the stock.
"You could get lucky a few times, but estimating a stock's price movement correctly every day is extremely difficult," says Ankur Kapur, investment head, Plutus Capital.
During a bull phase, when many stocks move up for a considerable period, day traders may make profits. They then attribute their success to skill rather than to the market's direction.
When the market turns, many of them incur large losses.
Leverage: To enhance their returns, day traders employ leverage. "Just as leverage boosts positive returns, it also magnifies losses," says Kapur.
Uneven playing field: Day traders think they have a 50:50 chance of making money.
"That would be true if all the players had the same amount of information, experience, and similar equipment," says S G Raja Sekharan, a Bengaluru-based value investor who taught Wealth Management at Christ University for over a decade.
"Retail traders are the weakest players in the field. They are pitted against seasoned professionals working with larger sums, who have more information and data at their disposal, work with faster computers, and so on, " Raja Sekharan adds.
"This reduces the retail trader's odds of making money.
Addictive: Intraday trading gives players a similar high as gambling. It can also become addictive.
"Even though a day trader may be losing money, they remain optimistic their situation will turn around. Besides, it is only a few thousand rupees in each trade. But eventually, those smaller sums add up and hurt their financial health," says Raja Sekharan.
Should you do intraday trading?
People in full-time jobs should especially avoid intraday trading as it results in loss of focus and affects performance.
"If you do it, then invest time and effort in learning trading strategies that have a reasonable win-loss ratio," says Shrey Jain, founder and CEO, SAS Online.
"Also, learn position sizing and risk management. Thereafter, stick to the chosen strategy," Jain adds.
"Make a small start and maintain a trading journal, which over time will offer you insights into your trading behaviour," says Jain.
Raja Sekharan suggests limiting day trading to about 5 per cent of one's net worth and stopping if that sum is lost.
According to Kapur, using charts to predict intraday movements may not help.
"Use charts to discern trends that last for a few months or quarters. You would stand a better chance of making money off those slightly longer-term trends," says Kapur.
If you have lost money in intraday trading, consider fundamentals-based, buy-and-hold investing. Here, the investor tries to assess the performance of the underlying business and then invests.
In the long run, stock prices eventually reflect a company's performance.
While fundamentals-based investing requires more work and patience, it is more likely to yield positive results as the investor pursues a company's fundamentals (primarily earnings) that are relatively more stable.
Also, increasing one's investment horizon reduces competition.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff.com
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