Why People Lose Money in Intraday Trading?
Intraday trading sounds like an opportunity to place trades and make profits – all in a day! But what most of us fail to understand is that there are more failures than successes in the day-trading market. The probability of your making intraday trading loss is higher compared to the chances of your making profits. Let us find out why it is so.
How does Intraday Trading Work?
Day trading operates on a simple principle which is, squaring off your trade positions within a day. The steps in intraday trading are as follows:
Step 1: Ensure that you have researched and done your homework, before deciding the stock you want to invest in. This is a crucial step to avoid intraday loss.
Step 2: When the market opens, place your trade, and buy the stock lot of the security that you are anticipating to appreciate in value within the same day. You can make the purchase directly through your demat account, involving some brokerage charges. Remember to mention explicitly that you are putting across an intraday trade.
Step 3: If the market moves basis your speculation and there’s a rise in your stock’s price value, then sell your earlier purchased stock lot at a higher price trending in the market and make profit.
Step 4: Square off your trade position and pocket the profits for the day.
Disadvantages of Intraday Trading
There are many drawbacks to intraday trading due to which we will incur loss in intraday trading.
Leverage: Intraday trading provides the advantage of making leveraged trade, meaning that it lets you use borrowed money to place trades higher in value that you could have individually afforded. While it is an advantage, it can act as a double-edged sword and result in higher paying back obligations, if your leveraged trade works against your stock’s price movements. Hence, you should be wary of leveraged trades and not indulge too much as it could amplify your intraday trading loss.
Constant Attention: Unlike long-term trading, intraday trading requires constant monitoring of the markets as your trades will be placed within the 24 hours. You cannot afford to lose sight of any significant changes in the stock market as it will increase the probability of encountering an intraday loss.
Higher Brokerage Charges: Brokerage charges imply the transaction costs incurred with buying and selling of securities. Considering the frequency of transactions are higher in day trading, it results in incurring higher brokerage charges.
Primary Reasons for Intraday Losses
While you may think of it as pure bad luck or destiny, there are some solid facts to why people incur day trading losses. Some of them are:
Half-baked Information: The success of a trade depends on multiple things. Especially in intraday trading, you should concentrate on dealing with just a handful of stocks but know about them in depth. The history of your chosen stock, its company values, new developments, support & resistance levels – these pointers should be on your fingertips. When you don’t invest in learning about your stock, loss in intraday trading can be hard to avoid.
Tendency to Panic: Price volatility is an inherent feature of the stock markets. However, you may end up cutting your trading position short if you panic at every volatile movement of your stock’s value and cause more damage than benefit. To avoid loss in intraday trading, you need to trust your research and not panic every time the market shows signs of price volatility.
Relying on Tips: While you shouldn’t miss an opportunity to seek tips from experts of day trading, it cannot be relied on as the only way to crack profits. Tips are great, but nothing works better than solid research work. You should rather concentrate on developing skill sets to read the market movements and place trades, as tips can only take you so far in your trading journey.
Risk Appetite: Your risk appetite will be different from the next person. You are bound to incur a higher intraday trading loss if you bet higher than you can sustain. It is very easy to get carried away in intraday trading and take on more trades with the mindset of earning more profits but doing this may turn out to be counterproductive if it doesn’t match your risk-taking abilities.
Loss in intraday trading shouldn’t hinder you from trying your hands at trading. Rather it should come as a signal to avoid the red flags and work hard toward making those trading profits.
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