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Well to start with frankly I do not like intraday trading. The reasons are plenty. Here are a few:
1. You cannot keep your legs on two boats and sail through. You are likely to fall down. What I mean is if you have a job and you trade intraday too then it gets hard to manage both job and intraday trading. If you get caught then you may lose your job. Well it has happened to me.
2. Too much brokerage. Even if you make some day profits and some day loss – the brokerage will take away 20% of your profits and increase the loss by 30%. Effectively even if you are a good intraday trader you will be left with very less money.
3. Intraday trading cannot be compounded. I read in moneycontrol a long time back that one trader traded with Rs.50,000/- intraday equity cash scalping, even today he is trading with the same amount. When asked why he is not increasing the trading amount – the answer given was obvious – FEAR. Think yourself – can you trade with 10 lakh rupees intraday? If no, then its clear intraday is not a long solution to trading.
4. Non directional trading is not possible in intraday trading. Positional trading can be directional or non-directional depending on traders skills and knowledge. But even if you want to become a non-directional day trader, it almost impossible to become a intraday non-directional day trader. So basically you have to see all the charts and choose among hundreds of stocks to figure out which stock to trade intraday and then take a call. All this while siting in your office where anytime your boss can come in your cabin and catch you trading stock markets and not doing your job.
This is the reason I always advocate trading positional with hedge trading which you can trade anytime you want and leave for the day.
However if you are doing intraday trading it is very important to keep a stop loss. But most traders do not know where to keep a stop loss.
In this article I will discuss some ideas on where to keep a stop loss. Note that if you are a trader you must give more important to stop loss than to profits. If you can limit your loss chances are high that over time you will make profits.
Here are some tips to help you decide the stop loss place:
1. For low-volatile stocks keep stop loss near and for high-volatile stocks keep stop loss at a distance.
2. If you have decided to keep stop loss at 5 points then the profit should be at 10 points i.e. doable points of stop loss.
3. If using a trading software for support or resistance – it is better to keep stops lower than support level given by the trading software or above the resistance if you have shorted the stock.
4. Do not take stops too wide or too tight. Count in terms of money what you may lose. Don’t keep a stop where you are afraid of being hit but do not keep very close either. Take a balanced view.
5. Whatever the condition never trade without a stop loss.
Bottomline to remember:
Remember this – wider stop loss will be hit less often but will take out a lot of money if it gets hit. Tighter stop loss will be hit more often but they will keep the loss smaller.
If you are a trader with a lot of money you may choose to keep wider stops, and if you are trading with less money you cannot afford to lose then trade with tighter stop loss.
A tighter stop loss will allow you to trade multiple times while a wider stop loss will allow you to trade only once a day.
Hope this article will help you to take better stop loss decisions.
If you have any questions please ask in the comments section below.
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