Sunday, October 18, 2009

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A Simple Strategy for Consistent Intra Day Trading


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There are a lot of ways to do intra-day trading of stocks. The beauty of intra-day trading is that it makes you feel like you are doing a full time job out of trading shares. Even with a single strategy you can keep trading all through the day. There is a simple strategy that I want to share today. This is really the simplest one as it does not take much effort on our part to find stocks and execute the trades. But it does have considerable risk and accordingly higher chances and potentially higher rate of returns.

Intra-Day Trading Needs Persistence

When day trading shares, most important thing to consider is to note the boundaries of the time that is fixed within that day. This is what makes the intra-day trading to be difficult, if not encouraging, for most traders. Even if you learn to accustom to this time boundaries still to persist all through the day is challenging. What if I tell that by sticking to one simple strategy you can persist all through the day?

That is what I am going to share now. When trading shares intraday consistently trade after trade, we need to make the task easier. Each trade consists of several activities within the same day. You need to find stocks, you need to look at their charts, order books, second order and if possible third order quotes as well, before deciding to make an entry. After making an entry, you should place it on auto-pilot with a trailing stop order and move on to other trades.

Trading Only Stocks at Their Highest or Lowest Levels

Now to make these tasks easier we can choose to trade those stocks that are closer to their intra-day highs or lows. Plan to go long on stocks that are trading near their intra-day highs and go short on stocks that are trading near their intra-day lows. As long and short trading share similar principles but in the opposite direction, it suffices to explain one direction.

Let us take the case of stocks to go long. It does not matter what time it is during the day. You can always find some stocks that are just closer to their highest value of the day. To find such stocks you should not just look at the list of top gainers, losers etc, though these also give the stocks list with least effort on our part. If these lists are exhausted meaning you took advantage of them already and they are still gainers of the day but not at their highest points of the day, then you need to go deeper in search.

Finding Stocks

Fortunately it is pretty easier to find such stocks by going to nseindia.com and keeping a list of stocks that show open, high, low and close prices at any point of time during the day. If your brokerage account’s terminal can show the same list as a table in one window that will be even better because they show real time quotes as close as less than a second. NSE India site shows with a delay of 15 seconds. It can be considerable time lag when trading volatile stocks with this technique.

Once you find a stock that is moving near its high of the day, place an order to buy just a little above high price. Now you need to place a buy stop order and not an ordinary limit order as beginning traders do. Because the trade gets executed immediately after placing an order to buy above the current market price.

This is not the way to trade with this strategy. We need to get in only if the stock were to breakout once again and make a new high higher than the present high price. This ensures that we will be in the trade only if the stock were to continue the uptrend that it started. If not our stop order will make sure that we never enter that stock. Don’t try to reverse the order thinking the stock might fall. Sometimes stocks just don’t move anywhere all through the day.

Placing Orders for Entry

In your entry order, you should place stop price just a little above the high price of the stock at that time. How much is the ‘little above’ depends on the volatility of the stock? I prefer to consider +0.15% for the stop price for highly volatile stocks. For non-volatile stocks this strategy is not very useful but if tried it is good to try with a +0.1%. Don’t increase this further as the brokerages in Indian markets charge 0.3% as typical rate.

The Limit price in your order should be again 0.1%-0.15% above the stop price. All in all you are betting on the stock making a move higher than a total of 0.6% from current high price to make sure the trade is atleast even. But note that often if the stocks breakout you could be in a ride as long as 10% of the stock.

The reason why we trade stocks at the highest point when common sense tells that we are paying higher price is because the probability of the stock going higher is high when it is trading at its highest point of the day. Otherwise tell me how can stocks move higher? One is by opening with gaps. But we are talking about trading through the day and not overnight. Expecting a gap up at tomorrow opening and buying shares at today’s close is a completely different strategy and is more riskier than the one I am talking about now.

If you want to take advantage of a sudden and surefire movement of the stock then go long on the stocks at intra-day highs and vice versa for going short. You can take any intra-day chart. If you generalize different charts of the same stock on different days or different stocks and different days, the chances of a stock making a sudden up move are higher than the chances of trend reversal when the stocks are at their intra-day highs.

Placing Orders for Exit

Putting the fear to rest, one important thing to mention is the exit strategy. As these stocks make rapid moves once they break out of the high price, they are likely to retrace of their move in the same pace. If you want to move onto another stock that you just found it is good to guess an exit point say 1% or 1.5% above the high price and place a limit order.

If you are a multi-tasker who can switch between observing charts, order books of multiple stocks that you have entered, then instead of placing limit orders try trailing stop orders. As the stock price moves upwards it will keep on making pull backs of small magnitude. Whenever a pull back appear to be larger than a pull back on both sides, take the lowest point in that pull back as the stop price for your trailing stop order.

If the stock were to continue the trend, the trailing stop price too should keep going up. When you change it continuously the profit will be locked when the stock makes a bigger pullback for the day or the hour.

Word of Caution

This strategy entails risk. So it is not a one time thing you should do. If it turned out that the first attempt of the day went bad, then it is natural feeling to not try again. To avoid great risks, use stop loss order compulsorily at just below the high price of the day after making entry into the stock. When a stock makes a high, breaks it and couldn’t find a support at this high, it is likely that it will break down further. Don’t worry too much about closing with a loss including brokerage costs for the potential profit can be much better with this strategy.

All of the time you should note that in intra-day trading all percentages, price differences would be very small. Don’t try this if you cannot digest these small numbers as big for the time during the trade.

Easy to Persist

It is easier to persist with this method in intra-day trading because the sudden move in the stock immediately after entry will get you excited. As much as the excitement if you also close the trade even with little profits and maintain stop loss order just after entry very close to the entry price, you are likely to persist with this strategy.

Another important thing to note is that finding the stocks not very hard. For any given day you can prepare the list of stocks the day before that by finding all stocks that made a white candlestick. In other words on the previous day the stock should have made a close higher than the open. The chances of a bigger move are high if there are atleast two white candlesticks after few black candlesticks till previous day.

You can also sort out stocks that just made 1%-5% gain within the half-an-hour. You can place alerts in your brokerage terminal (if they allow) or write a script to do that on your computer which suddenly pops up a window to tell that a stock just reached close its intra-day high. The ideas to find the candidate stocks are only limited by your imagination.

3 comments:

Sunny Depp said...

nice stuff mate... how is it going now?

Narender said...

Thanks friend.. I am working on a solution. I went out of habit. I will get back to it most likely with the next plunge.

LincolnNicke said...
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