Access to easy margin money in day trading makes people believe they can become a full-time trader with very little investment but you should consider the following before planning to be a full-time trader.
1. Margin Money
If your expectations to become a full-time day trader is because you have access to margin money, make sure you know the truth about margin money.
Normally in large cap stocks, you are allowed a margin of 20 times. If you have 1L or 100,000 in a trading account you can buy securities worth of 20L or 20,00,000 for day trading.
On 20L with a target of 3% and a stop loss of 2% means you can gain 60,000 Rs but if you hit a stop loss you lose 40,000 Rs out of your 100,000.
I generally don’t take a single position of more than 1/3rd or 1/4th of my net asset in my trading account. The amount of capital you deploy in your trading account will affect your ability to make a living trading and not because you have an access to margin.
People expect high performance as a trader. Every trader dreams of taking a small amount of capital and becoming a millionaire.
Even if you are not using margin money, keeping your expectations low as a trader is always desired.
As a trader, profits can accumulate and compound over time but professional traders often make around 20-25% per year but new traders often assume they can make double their money in a single year which means 8-10% per month return.
Though some trades can provide you such those handsome returns, but they will be far and few in between and you must have a provision of win vs loss trades.
If you are expecting more than 2% per month, it is impossible for an elongated period of time.
Once you are thinking about being a full-time trader, make sure the amount of brokerage that you need to be pay is in your calculation.
If you are planning to be a day trader, you should opt for low brokerage firms like Zerodha but at times those low brokerage firms have issues for downtime of their platform as well.
In day trading the least you pay is 1 paisa per 100 Rs of traded value as a brokerage. If you are not squaring the position the same day, then you pay 10 paisa as brokerage per 100 Rs of traded value.
If your monthly positional trading value is 20L, your brokerage paid will be Rs 2000. Add STT and service taxes to it which could make this figure reach 2500 to 3000 Rs per month.
If your brokerage plan is higher like 2 paise / 20 paise or 3 paise / 30 paise, your brokerage expense can be considerably higher and it is irrespective of you make profit or loss.
4. Paper Trading
Take a sheet of paper and execute paper trading. See what percentage of trades are profitable.
How many hit stop losses and how many hit targets and how many you hit profits but not target and how many you book loss but not wait till stop loss.
Estimate your return on investment or ROI and success ratio of your trades.
- ROI is calculated based on the fixed amount of capital invested the amount of profit made.
- Success ratio is the ratio of number of profitable trades to the number of loss making trades.
Trading is outnumbering the number of loss making trades to number of profitable trades.
5 and 6. Risk and Stop Loss
The most important aspect to trading is understanding the risk and cutting your losses.
How much one should risk?
As a general rule, I never risk more than 2% of my total trading capital.
Note: 2% of the total trading capital and not 2% of the total amount of trade executed.
Understand with an example. If I have 5L in my trading account and if I am taking a position of 2L my stop loss will not be more than 10k which is 2% of my total trading amount of 5L. It is not 2% of 2L I invested in a particular stock.
If the stop loss for a stock does not fall within what I am ready to risk, it is a no trade for zone for me.
Target is also based on my stop loss and it is at least 1.5 times I am ready to risk. If I see a major resistance level before my target levels, it is again a no trade zone for me.
Less capital being deployed can mean you take excessive risks for better returns.
7. Worldview of a Trader
In India, anybody can be a day trader but in developed market like U.S. there is a minimum balance requirement in your trading account before you can day trade and opt for margins. The minimum amount is $25,000 or roughly 17L and that is not all if balance drops below $25,000 day trading isn’t allowed until a deposit is made bringing the balance above $25,000. – Reference.
$25,000 is not just a random number that US has put for being a day trader. I also believe if you want to become a full-time trader with under 10L, it is a waste of time. 24% per annum returns mean 2% per month. With 10L, you make 20k per month which is quite low when compared to a job of a person who has accumulated a capital of 10L.
Full time trading is not something that should be done unless you can deploy sufficient amount of cash.
Over to you
What is the capital you have deployed for trading? What is your return on your investment or ROI and what is the success ratio of your trades? Share them in comments below.