by When I was 26 years old, I wrote down one statement in my journal, “This year, I will make ₹10,00,000 from intraday trading.”
I managed to take some intraday trades every day along with my IT job. At that time, I had 3-4 years of experience in intraday trading, and before that stayed in the “breakeven zone” (no loss, no profit) for over 6 months.
I figured out my common mistakes and assumed I could make a lot of money if I avoid these mistakes in the future.
I did not make 10 Lakh that year.
Or the next year.
Or the year after that.
It took me most of my 30s to realize that making money is a lot like driving a formula one car.
Most people will not be able to drive a formula one car if they get an opportunity. What is the reason? After all, it is “just a car”.
I know what you are thinking in your mind now – it runs fast, has only one seat open to the air, is damn good at acceleration, braking, etc. So, it is not just another ordinary car. Do you agree?
The same logic applies to intraday trading as well.
By definition, intraday trading is only a ‘type of trading’ in which you have to close the trade on the same day.
So on the first look, most beginners think it is damn easy to take intraday trades.
Yes, it is damn easy to take intraday trades, but not so easy to make profits in the long run.
Because intraday trading provides many trading opportunities, we have to make the right trading decisions to succeed in intraday trading.
Let me take an example to illustrate the same.
For example, a stock opens at 100 in the morning, and soon price moves to 110 within 2-3 hours.
If a person had bought 1000 shares in the morning and sold at 110, he would have made a killing profit of Rs 10,000 within a few hours. The same gain will be increased multiple times if the same trade has taken in futures or options.
Looks rock solid on paper, right is intraday trading?
But we should ask three questions –
- What will happen if the price comes down to 90 instead of 110?
- What is the probability of getting similar success with every trade?
- Is there any possible random distribution of “continuous losses in one stretch?” If yes, how to manage it?
If you get the proper answers to these questions, I am sure you will grow as a trader.
I will take a simple example of an intraday trading system to explain further.
Open Range Breakout (ORB) is a popular intraday trading strategy among most day traders.
This strategy suggests taking the trade in the direction of the breakout of the predefined range (mostly in 1-hour).
If the price breaks the 1-hour high, we should opt for a long trade, and if the price breaks the 1-hour low, we should plan for a short trade.
But, this strategy doesn’t show good results (if we use it in the same manner) in the changed market conditions as it gives many false breakouts and breakdowns.
Looking at the above image, it is clear that this strategy failed, and the price moved in the opposite direction. If a person had opted for a long trade in the above case, then the price would have hit his SL.
Hence, it is crucial to include a filter that avoids false breakouts. The filter below helps pick only the successful trades (higher probability) and avoids wrong moves.
When the ‘wick’ of the breakout candle (which breaks the 1-hour range) is more than 15% of the entire body (of the breakout candle), then it is good to avoid this long trade as there is a high probability of false breakout.
If the wick is less than 15%, then we can plan a long trade above the high of the breakout candle, keeping a stop-loss below the low of the breakout candle.
Are you curious to know what could be the returns if a trader uses this intraday trading strategy?
I have backtested this intraday trading strategy with 10-years (from 2011-to 2021) of historical data from Banknifty, a major index in India, and got the below results.
Back Testing Settings
Initial Capital – Rs.3,50,000 (3.5 lakh)
Trading Instrument – Banknifty Futures
Timeframe – 15 Min chart
Trading Window – 2010 to 2021
Total trades – 1759
Position Sizing – Fixed 2 Lots (No increment with capital)
Initial stop-loss – 1% away from the entry price
Transaction/Slippage Cost – 0.002%
EOD exit – 3.15 PM (IST)
Ending Capital – Rs.12,12,841
Accuracy – 50.2%
Profit Factor – 1.2
Losing trades in one stretch – 8
(please note, the returns will increase multiple times if I increase the position size along with an increment in the capital).
So this system has an accuracy of 50%, which means out of 100 trades, we get 50 failed trades.
Do you think we get the below results in trading?
WLWLWLWLWLWLWLWL
(W – win, L – loss)
Definitely no, right?
It is based on the random distribution, and in the above strategy, there is a possibility of getting 8 failed trades in one stretch, as shown below:
WLWLLLLLLLLWL
So, by any chance, if you risk 10% of your capital per trade, whenever you face this scenario, you lose 80% of your capital. Isn’t it?
If you risk only 2% of your capital per trade, even if you get 8 failed trades in one stretch, you lose only 16% of your capital. But it also reduces the profit-making potential.
This is why most people lose money in intraday trading because nobody wants to become rich people slowly. Most people aim to become a millionaire overnight.
So if a person understands the trading strategy (it should have a positive edge similar to the above system), risks only 2% per trade, and persists with his efforts in the long run, then there is a high probability of making profits.
