From over 70K+ audience on my Instagram, one of the most common question is “Can I generate regular income from Short Term Trading”?
The answer is yes for sure, you can read about some of the best traders/investors in the world here
But million dollar question is how?
Before digging deep into the topic, I would like to clarify that stock market is a place where most of the people are selling dreams.
Reality is, the investors/traders who know how to generate regular income from short term trading will never reveal their success mantra to anyone.
But the good news is, here is a systematic process that you can use to find good short term trading opportunity and earn regular income from the market.
I am not claiming that I am an expert of this, but yes I did a lot of research and invested most precious 5 years of my life. Although, different people have a different opinion on this subject and it’s a matter of debate among technical analysis and fundamental analysis. But I believe that the by following the method listed here you will be able to generate regular income from the market.
Sounds good!!
Keep reading!!!
Types of Investment/Trading
Based on the time horizon of a trade, i believe there can be 4 different types of trading opportunities
- Long Term Investment
- Short Term Trading
- Intraday Trading
- Scalping
I am not going into detailed classification of different trading styles, but the sequence of different trading style is based on level of difficulty faced by retail traders. Long term investments are great but the problem is, it is for creating wealth and not regular income. Also you need a big capital for significant returns.
In case of intraday trading, data says that less than 5% of traders are making regular income and it requires lot of emotional discipline and mental strength. Also, in the age of Algo trading and High frequency trading (HFT), it is very difficult for a retail trader to succeed.
In a one-liner, let me admit intraday trading is not everyone’s cup of tea. It is too risky and volatile to handle.
Scalping may seems easy from outside, but it is the toughest form of trading. High accuracy and exceptionally well execution power makes scalping the toughest form of trading to be honest.
For a retail trader, I believe the short term trading is best. It is because of the fact that it gives you time to think about your trades and requires less screen time. So you can do it a part time also.
So what I mean by short term here?
Market moves in swings that usually last for 10-15 days. So if as a trader I can successfully identify the reversal points then I can easily make money. Based on this, I prefer to initiate a trade for 1-4 week time frame.
Obviously it is not that easy, anyway stock market is not easy, although it is very simple.
So sometimes it happens that when we take trade market goes nowhere and just stuck in a range.
So, I created a simple rule based method.
If stock gives momentum then I will wait for either of stop loss or target for maximum a month. If it goes direction less then I will exit after a month.
How can i generate regular income from Short Term Trading?
Now the question is how to generate the regular income from short term trading?
We need three things to make it for a living
- A strategy/Understanding of price behavior (Price action)
- Sufficient fund (As per your requirement). I am giving simple figures, you can make 5-7% max in a month, that too when you are a good trader.
- And Money Management. My simple rule is to divide my capital in 4 equal parts and take 1% risk on my capital in each trade. Let’s figure out how it works with a capital of 1000K
Initial capital = 10 Lakhs
Capital allocation 250K each
Risk in each trade: 1% of 10L= 10K
By doing this even if I work with 50% accuracy and more than 1:2.5 RR
By end of the month if finish 8 trades then i will be able to generate 5% on my total capital.
How I Select Stocks for Short Term Trading?
In short term trading (in equity cash) a trader makes money when price moves higher. But it is important to understand that real test of the short term trading is when the market is on a downward trend. It is because when the markets are in downtrend, there are very few opportunities or technically no opportunity at all.
There is a common misconception that when markets are going down then for sure investor will be at a loss. It is true to a large extent but please note that some of the stocks still ride against the tide. The index only comprises of handful stocks. For example, there are more than 2000 stocks listed on NSE (National Stock Exchange). One fine day (25th Jan 2023) when the NIFTY dropped by 1.25% that is huge fall, there were 522 advances, and 1715 declined.
The point i am trying to make is that short term trading opportunity always exists even if the market is on a downward trend. Therefore, stock selection for short term trading should be such that stocks selected should ride against the tide at least for short period.
I use following as key parameters to select stocks for short term trading. Also, note that none of the following parameters should be considered in isolation.
1. Price Movement
While initiating a short term trade it is most obvious that a trader should understand the price behavior correctly and reach onto a final conclusion. It includes entry into the stock, exit in case of profit target and exit in loss if stock invalidated the setup.
For a short term trading I prefer to see past 25-30 days price movement on a daily chart. Basically, I look for an existing established trend, (Read our trend analysis manual here) then an area of value. To fine tune my entry position and reduce the risk, i prefer to use multi timeframe analysis. Like I may use 1 hour time frame with a daily chart, or I can use a combination of weekly chart with daily price movement.
To learn chart analysis you can join our free telegram channel
2. Volume
In layman’s terms, only two information is being generated after a trade. A price level where trade is executed and number of quantity traded (volume). Every other information like volatility, momentum, delivery percentage etc. are derived out of these two information. So, understanding volume analysis is very important for a short term trader.
In my opinion volume trend analysis is a very tricky, as most of new traders do not know the role of volume. Volume can be increasing since last 3-4 sessions but it might be lower as compared to the last 30 days volume.
So, as a thumb rule I used to compare 5 days 15 days and 30 days volume average. Always remember increasing volume in uptrend indicates strength in bulls whereas decreasing volumes with increasing price indicates a continuation of downtrend. A divergence in volume and price indicates profit booking.
3. Delivery Percentage
Before understanding the delivery percentage we must understand what delivery volume is? There are trade who buy and hold and also there are traders who only trade in intraday. Whoever is buying and holding stocks for short term or long term are taking delivery of the stock.
So as the name suggest the delivery percentage is nothing but the percentage of total volume bought for holding.
So a direct interpretation is, if delivery percentage is high it means traders are expecting that the stock can move higher in coming sessions. But here is the catch, some stocks are only for investment purposes and some stocks are trader’s favorite. In investing stocks, the delivery percentage is higher where as in trading stocks (Nifty 50 and FNO stocks) the delivery percentage is usually different.
It makes delivery percentage is quite misleading similar to the volume. For any serious buying in the stock, you should check and compare the delivery percentage of 3 days, 5 days and 7 days.
4. News and Events
As a trader my prime focus should be on to saving my capital. How much percentage I will gain that is secondary. In case of a news based stocks or if there is any major event going to be announced, there is a probability of wild move in stocks / index. In such situations, although it is possible that we may get good quick gains but market may destroy your portfolio by just one news.
You may imagine holding Adani group stocks on 25th Jan 2023 and 27th Jan 2023
Our recent short term trade was in CANBK, here is the setup.
