The pleasures and perils of day-trading

7.30 am: Woke up groggy-eyed. Reached out for the newspaper and watched CNBC for about half an hour. So many results, so many stocks to check out.

8.45 am: Feel all pepped up for another day of gains (hopefully). No sign of Monday morning depression. It feels good when you have just made Rs 50,000 on a Friday.

9.20 am: Arrived at broker's office. It's raining heavily, but not enough to dampen my spirits.

9.30 am: Greeted my fellow day-traders. 'Kem cho, bhai? Majaa ma?' Feels just like family. Hirenbhai tells me Satyam should be really hot today. Let's see.

10.05 am: Looks like Hirenbhai was right. Satyam is seeing fairly large volumes. I checked to see if the price was moving as fast as the volumes. Seems so. "Hirenbhai, buy 3,000 Satyam at Rs 180". The screen is my guide.

12.30 pm: I have executed five safe trades in the first two hours of trading; spotting uptrends has become so easy with experience. Buying and squaring off positions in a particular scrip within the span of a few minutes may not net me much, but I have made Rs 10,000 so far. Not a bad start.

Let me check out Satyam. Rs 183, Hirenbhai was right. Anil got out at Rs 183. Fool, he should not have capped his profits so soon. But then, he has always been bull headed.

1.05 pm: Hirenbhai tells me to check out Welspun Gujarat. The stock has moved one way in the last three days. I have already made some money in it. Hate to touch stocks like this, but no risk, no fun.

"Hirenbhai, buy 6,000 Welspun Gujarat at Rs 23.70". Satyam is at Rs 184.35. Suresh and Amit have got out and yell out the news. Maybe, I must get out, too. Perhaps after lunch. Checked out the price of Welspun on the way - down 75 paise. Not a good sign.

1.55 pm: Felt a bit queasy after lunch. May be it was the numbers of the screen, which showed Welspun down Rs 1.25. Hirenbhai tells me that the stock is bound to come back and he has news from a reliable source.

In the last five years I have survived just because I know when to cut my losses. "Hirenbhai, sell my 6,000 Welspun now." Can't say making a loss does not hurt, even though Satyam is still going strong at Rs 185.

Almost all my friends are through for the day. "Arre bhai, get out," yells Anil. I think I will do that in just a few minutes.

2.35 pm: Welspun has recovered to Rs 23. May be Hirenbhai was right after all. But I don't believe in looking back. HLL is looking good.

"Hirenbhai buy 3,000 HLL at 156". Sold half my Satyam shares at Rs 185.30. But now it has fallen to Rs 184.70. "Hirenbhai Satyam, poora nikalo".

3.20 pm: HLL has risen slowly by Rs 1.50. I can live with that. "Hirenbhai, sell all my HLL. Checked out Welspun just for the heck of it - Rs 22.05. That feels good. Made Rs 35,000 today.

If my luck is even half as good for the rest of the week, I can surely be off to Dubai. Wife's been complaining all of last week. May be she won't complain if we can go shopping in Dubai.

4.05 pm: Cutting chai after a day like this is infinitely satisfying. Anil looks sheepish for having bailed out early. I feel bad for him. Hard luck, bhai.

If day-traders had time to maintain daily diaries, their daily jottings about personal highs and lows might well have resembled the one above.

Last year, when the market appeared to be heading nowhere, many of them may have considered diary-keeping a more exciting vocation. After all, nothing much was happening on their screens.

Not any more. With day-trading offering easy pickings in a 12-week bull run, compulsive intra-day traders are emerging from the woodwork and chancing their arms in pursuit of the proverbial quick buck: thousands, if not lakhs.

The foreign institutional investors may be driving up the market with their billion-dollar investments, but it is the day-traders who are enjoying the ride. Heavy, delivery-oriented trading brings just the right kind of price volatility and trading volumes needed for day-traders to hitch a free ride.

Day-traders love volatility since big money can be made only if prices fluctuate widely enough for them to cover brokerage and other costs.

It is easy to think of day-trading -- the business of taking up positions in stocks with the intention of squaring up your positions before the closing bell -- as a mug's game. It is -- for some.

Anyone who dabbles in day-trading to keep the home fires burning is probably likely to lose his shirt – and deservedly. Day-trading doesn't not depend too much on stock fundamentals. The game is played more by seat-of-the-pants instinct than anything else, though it has it own science.

Says Jamshed Desai, head of research, Taib Securities: "There is a risk component to it, but day-trading is a science in itself. You have to have an aptitude for it. Those who day-trade cannot invest and those who invest cannot day-trade."

The math is beguiling. If you bet Rs 100,000 on a scrip that rises or falls 3-5 per cent on an average trading day, your potential gain could be Rs 3,000-5,000 daily (assuming you exit before the day's peak on grounds of prudence). A gain of 3 per cent a day means a return of over 1,000 per cent annually.

In good months, lower- to middle-rung traders make over Rs 70,000-80,000 after deducting brokerage and other charges. For the veterans, the sky is the limit.

If that's the major attraction of day-trading, the downsides are equally dounting. To deal with the risks, small-time day-traders fix a particular amount as the maximum loss they are willing to suffer on any particular day. The range can be anything from a couple of thousands to lakhs. Big-time traders net in or lose lakhs on any particular day as they do not have any fixed limits.

"Never stretch your resources; keep an amount that you can afford to lose," is the advice of Hemen Kapadia, a seasoned player.

Clearly, day-trading is not for everyone. The trading floor is replete with stories of traders who have lost everything in the pursuit of millions. So much so that 'Fort to Goregaon' is a familiar riches-to-rags phrase. (Fort, in downtown Mumbai, is where the BSE is located. Goregaon is a distant suburb, where you rebase yourself after a hectic losing streak on Dalal Street.)

"Day-trading is not for people who cannot bear to see their capital go down. Those who cannot do this should not even think about it", says Ajay Kejriwal of Jet Age Securities.

For successful day-trading, decent capital backing and a strong financial background are obvious advantages. Other requirements are a sound ability to deal with stress along with persistence and a willingness to take losses. One should also have a broker with whom you keep a certain margin to begin day-trading.

A majority of day-traders are given terminals by brokers to execute their trades. Access to the latest news and being well networked are the other requirements.

"Day trading is a good profession. It has its risks but could prove to be extremely rewarding if done the right way", adds Kejriwal.

Most day-traders stress discipline and prudence as key to making daily stock calls. Since intra-day prices tend to move on the basis of both rumour and fact, canny day-traders must also have the ability to filter out genuine news from garbage.

"To be a successful day-trader, two factors are imperative: an acute sense of momentum in stock prices; and the right psychology," says Desai of Taib.

"Assimilation of knowledge and a perception on what kind of news moves the markets are very important. Day-trading is not everyone's cup of tea. One has to be focused and also make use of the sea of technical data available," he adds.

Desai stresses that a key requirement for day-trading is the ability to stay detached from any particular stock. You can't afford to fall in love with an Infosys if you are a day-trader.

The best day-traders look at stocks as moving numbers to be taken advantage of, says Desai. Volumes are the key and sectors, financials and information do not matter much.

The Smart Investor spoke to four day-traders to understand their world, and the pleasures and perils of day-trading. Here they are:

Hemen Kapadia
Day-trader since 1986

At first glance, Hemen Kapadia seems to fit the bill of a typical Dalal Street veteran with his salt-and-pepper hair and eyes which sparkle when certain stocks cross his mind. Here's a shocker: he's just 32 and that sprinkle of white hair is the result of premature greying. But then, he says breezily, he has always been mature beyond his years.

He claims he is prosperous today only because he has been a successful day-trader. Kapadia has a flair for technical analysis and all his transactions are based on technicals.

"Technicals are what work for me. I don't need fundamentals and hot tips," he says. As a college student, Kapadia used to study balance-sheets before buying stocks. After graduating in commerce, he discovered the joys of technical analysis and out went the balance-sheets.

How does Kapadia pick stocks for day-trading? He says he looks at all BSE indices and analyses prices and volumes. He also applies the Elliot Wave Theory along with normal mechanical indicators like ROC (rate of change) and MACD (moving averages convergence-divergence), two key numbers to watch in technicals.

He also looks at patterns, angles and retracements. He then narrows it down to a particular sector and then a particular scrip.

Despite being technically focused, Kapadia has his sentimental favourites -- Tisco and Reliance -- of which he has fond memories. "One tends to develop feelings for a particular stock after some memorable trades. However, in most cases, sentimentality could work against you", he admits.

His favourite trading cycle used to be the four-six week cycle during badla's heyday. However, nowadays he is more of a day-trader. Kapadia doesn't believe in derivatives. Badla was the real thing, as he used to make five times as much in those days.

When he is not trading, Kapadia advises a select client group for a fee. Till about five years ago, he could not bear the thought of going through a whole day without a single trade. But he has matured. " If you don't see it, don't do it," he says.

In other words, sometimes inaction is also necessary to guard your assets. In fact, he had recently done time away from the screen -- two whole months without taking up a single position.

Despite his belief in technicals, he admits that sometimes technicals can go wrong. But the gains he made from them clearly outweigh the losses. The 'growing up' extends to the way he thinks about profit targets, too. Kapadia used to have humungous profit targets of 60 per cent on capital employed during the bull market phase in the days of badla.

In a bear market, he is happy if he gets around 15-20 per cent. Kapadia claims that he has not used a financier for years and follows a very traditional method of trading through a broker.

He claims to have benefited by reading two books – The Elliot Wave Principle, by R N Elliot, and Technical Analysis for Stock Trends by Robert Edwards and John Magee.

Best deal
Kapadia's most memorable trade was in his sentimental favourite Tisco in April 1992, when he benefited tremendously as the stock price shot up from Rs 250 to Rs 750.

Worst deal
Kapadia has also undergone disasters in scrips like Pentamedia and Mura Black, which shaved off a significant part of his investments.

Lessons

• The market will always do what it has to do to prove the majority wrong;
• The market takes 90 per cent of its time to make up its mind and 10 per cent to get there;
• When the panwalla talks about buying shares, it is time to get out of the market.

Key success factors in day-trading

• Discipline and mental toughness;
• Scientific approach to stocks;
• Strict stop-loss levels.

Gunjan J Shah
Day-trader since 1990

Gunjan J Shah is another example of a day-trader who has hit it big in the market. A day-trader for almost 12 years now -- he has been into it ever since he completed his second year in college -- Shah trades with Angel Broking Ltd.

Shah's stock selection process is fairly simple. To figure in his radar, a stock must have reasonably good fundamentals such as growth prospects and attractive price-earnings (P/E) multiples.

Once he has filtered these stocks, Shah looks at trends in liquidity. His rule of thumb: if volumes increase by 25 per cent over the previous day's levels, buy the stock; if they fall by 25 per cent, sell it.

Right now, Shah has restricted trading to sectors such as banking, power, refineries and cement. Reason: it's easier to make money through day-trading in sectors which are in favour or trending upwards.

His favourite picks are: Bank of India, UTI Bank, BSES, Tata Power, Grasim, L&T and ONGC. His earnings net to Rs 70,000-80,000 a month after taking into account commission and brokerage.

Besides engaging in day-trading he also trades in the derivatives market. However, in the latter he prefers to keep his positions open for seven-eight days.

The reason for his remaining invested for a longer time period is that he aims for 15 per cent returns on investments. Such high level of returns are necessitated by the high margins that he has to keep with his broker.

For every trade that he enters into, he has to keep a 50 per cent margin with the broker. The margin comes in the form of stocks that he has bought in the past. The brokerage that is charged is also high: 0.5 per cent for each leg of the transaction.

Best deal
The maximum amount that Shah made was in February 2002, on Budget day, when he made Rs 300,000. Gunjan had taken long positions in ITC and Tata Tea as he expected the finance minister to make some provisions that would boost the prospects of these companies.

The expectations materialised and the two stocks shot up right after the announcement of the Budget. Gunjan decided to sell half of the stocks bought on the same day, and took delivery of the other half expecting a bigger jump in prices the following day.

Fortunately, the upward movement in stocks continued the next day also and both hit the upper circuit filter. Shah sold the remaining holdings and made a terrific profit.

Worst deal
Shah's worst trade cost him about Rs 350,000. Some time in late 1998 he had taken up a long position in HFCL as volumes were rising.

But the stock hit the lower circuit almost immediately, blocking any efforts on the part of Shah to square off his position. The stock opened at a lower price the next day, too, resulting in a huge loss for Shah.

Lessons

Never put all the money in the same basket. Divide the total money to be deployed into at least three parts and then trade. This will provide enough opportunity to learn from mistakes and correct them.

Key success factors

• Stick with sectors and stocks you are comfortable with;
• Strict stop-loss a must.

Prashant Nandurdikar
Trading for about two months

To begin with, Prashant Nandurdikar was confident of pulling it off on his own. But very few are lucky in the stock markets and Prashant was certainly not lucky in his first few trades. Within a week, Nandurdikar lost about Rs 50,000. After a post-mortem on his trades, he found that he was ill-disciplined.

Like most amateur investors, Nandurdikar lost money by allowing himself to get carried away by market sentiment instead of squaring off positions at the right prices most of the time.

Nandurdikar quit his cushy job as a regional manager at a printing press in Mumbai to choose day-trading earlier this year. He was simply tired of the nine-to-five routine and wanted to be his own boss.

Day-trading sounded an interesting option. Compared to starting his own business, day-trading seemed a better idea since it had fewer constraints. Before becoming a day-trader, he had been dabbling in stocks for some time. So it wasn't exactly a new business for him.

Nandurdikar may not be a pro yet. But with the help of expert friends and brokers, he has laid down a few rules to make steady profits. For one, he has chosen a few companies, based on fundamentals, to trade in. He restricts trading only to this set of stocks, including Tisco, Telco, Arvind Mills and Tata Chemicals.

The surprise element: there are no technology companies in his set. Nandurdikar says he chose his companies because of the "reasonable trading range" they offered. That is, the stocks are not expected to move by more than 5-6 per cent in either diretion on any particular day.

His loss-limit on any day is Rs 5,000. The trades that he enters into are executed on the basis of technical analysis tips and market intelligence sourced from his broker.

While the selection of stocks is done on fundamental factors, trading is done on the basis of technicals. The technical analysis tools he relies on the most are trend lines.

Nandurdikar declines to indicate the amount he trades daily, though he does indicate that they run into lakhs. He relies on the financial newspapers for news.

Lessons

Get into day-trading only if you have some experience in trading. Otherwise, look for guidance to familiarise yourself with the nuances of trading.

Key success factors

• Selection of stocks on the basis of fundamental factors;
• Insistence on a select set of stocks.

Sudhir Desai
Day-trader for 12 years

Sudhir Desai trades actively in the market, besides running a chartered accountancy business. The style of trading ranges from delivery-based to squaring off positions within the same day. Though this may appear a bit surprising, there are good reasons for it.

As he explains, a market that is trending in a particular direction offers better opportunities for making profits within a short span of time.

He says that a market bound in a trading range limits the gains per day, which makes delivery-based trading attractive. Thus he follows the basic tenet of day-trading: money can be made only if prices fluctuate enough to cover the brokerage charges.

Desai primarily depends on factors such as sectors that have been seeing some volumes, and their price movements on the previous day, to select stocks. He says that if a stock has seen a major change, say of 10 per cent, it qualifies as a tradable stock.

However, he points out that it must be accompanied by an increase in volumes also. His benchmark for a change in volume is 50 per cent if he has to take a position in a stock.

Unlike the other pros, Sudhir does not work with stop-loss. Rigid stop-loss trades tend to increase losses, as one may prematurely book losses, he says.

Desai has left the everyday working of his company to his subordinates, and visits his office only twice or thrice a week. Instead, he works a five-hour shift at the broker's office for rich pickings of several thousands a month.

Best deal
Desai earned more than Rs 10,000 in one day a couple of weeks back when he bought United Phosphorous. The scrip had hit the upper circuit the previous day. Desai entered the stock at Rs 357 and sold at Rs 380 within just 15 minutes.

Worst deal
In 1999, Desai lost Rs 20,000 in Vikas WSP. He had bought the shares after the price had fallen from Rs 1,200 to Rs 400. However, the price continued to fall till it reached Rs 6, a level at which it was delisted by Sebi.

Lessons

Rely on your own experience in day-trading. Act on advice that you get from outside only if you are reasonably certain that it is correct. Else you may make losses.

Analyse your past successes and failures to develop a profitable trading strategy. You will also get to learn the normal trading volumes in a stock. Any deviation can be used to book a profit.

Key success factors

• A unique trading strategy whereby losses were limited;
• A good information source.