Investing is an intricate business. From day trading, swing trading and investing, there are a number of approaches and philosophies that are taken by investors to the stock market. Each investor has their own beliefs and approaches that they apply to the stock market, depending on their financial goals and the time horizon in which they expect returns. Thus, the approach and investment strategies for a long term investor will be vastly different from the day trading strategies and intraday trading strategies employed by short term traders.
Generally, it has been observed that day traders, especially those who are looking to explore day trading for beginners, spend monumental amounts of time analysing a number of parameters, from an assortment of indicators to price action theory in order to meticulously map out and plan the entry of their day trading strategies. However, come time to exit, many of these traders have seen all their efforts diminished by a lack of a well thought out exit strategy. This is understandable. While it might be easy to assure yourself that you will book profits when your target has been met, we often find ourselves falling into the trap of expecting the graph to exceed our expectations, and holding on longer than we should. Within a short period of time, we could see all our profits diminish.
In this article, let’s take a look at some tips for day trading for beginners, some intraday trading strategies and day trading strategies in order to plan a good exit that provides a solid follow up to your well thought out entry strategy.
1. Risk and Reward ratios
This stands to be one of the simpler day trading strategies, and can easily be included on any list of day trading for beginners. While we will break down this strategy further, the gist here is to ensure that you are picking a risk to reward ratio that is favourable and makes the trade worth your investment. Let’s break down the first of our day trading strategies.
Let’s assume that the price of a stock is at 10 rupees currently, and you have expected it to rise to that of 15 rupees. Based on your analysis of the historical support and resistance levels, this seems like a reasonable possibility. However, you must also account for the risk, or plan for the unfavourable scenario. Let’s assume for instance that in the unfavourable scenario, the price does not ascend according to the trend line you have mapped, and instead moves downwards. If you place your stop loss at 9 rupees, then you have achieved a reward to risk ratio of 5:1. Meaning, for the possibility of making 5 rupees, you are risking one. This is a good position to have.
However, if you place your stop loss at 8 rupees, your risk to reward ratio has been slashed by half, to now 2.5:1; In order to make 5 rupees, you are risking two rupees. The key here for day trading for beginners, therefore, is to ensure that you pick a reasonably favourable scenario and a realistic unfavourable one. For instance, if you place your target at 20 rupees and SL at 9, then you achieve a reward to risk ratio of 20:1. However, it might not be likely based on the historical chart that this price is ever met. Therefore, you must generate realistic expectations in order for this strategy to work
2. A trailing stop loss
A trailing stop loss is another one of the day trading exit strategies that are aimed at balancing the risk against the reward in an attempt to minimise risk. As the name suggests, as part of this strategy to be used in day trading for beginners, the stop loss is updated every time you increase your sell price, in order to cover up your risk. Let’s take a look at an example.
If you buy a stock at 100 rupees, then you place your stop-loss order at the 99 rupee mark. If the price moves favourably, causing you to increase your sell price to the 101 rupee mark, as part of the trailing stop loss day trading strategies, you would move your stop-loss order to 100. Once this is done, the stop loss is not moved back down. If you move up to 105 for instance, placing your stop loss at 104, then at no point during this trade will you reduce that stop loss below 104. At some point in time, the pull back on the price will cause your stop-loss order to be triggered, booking your profit in a manner that has effectively mitigated risk.
One drawback here is that if you have a large order, and the daily traded value for that stock isn’t too high, then you might struggle to offload your stock and risk the price falling below your stop loss for some percentage of your stake.
3. Time-based exits
As part of this line of day trading strategies and intraday trading strategies, your exit is based around major events in the trading hours. If there is news that is about to come out about a certain stock for instance, someday traders will stop all day trades a couple of minutes before the news is announced. Once the news is announced, they then resume trading.
Many traders spend a long time planning out their entry for a day trade or as part of intraday trading strategies. However, the effort you put into identifying the point of entry will all be washed away if you are not able to successfully exit the position. In this article, we have broken down some such day trading strategies that might help you better choose your exit points on a day trade.