Many day traders use targets to exit day trades with a profit. While this is very convenient, targets miss out on much larger profits when there is a strong move.
Traders typically place targets 1-2% from their entry price. Market advisors often set even smaller targets to improve their chances of being proven right.
A more profitable way of trading is to use trailing stops instead of targets. A trailing stop is like a stop loss, except that it results in a profit rather than a loss.
Here is how to trade using trailing stops for a long (buy) trade. When you enter your trade, place a stop loss sell order as planned. If the stock starts rising, raise the stop loss order to a higher level. Keep raising this level as the stock keeps going up. The stock will eventually fall below one of these traling stops, or will close with a substantial profit.
There are different ways of arriving at trailing stops. One way, for instance, is to protect a certain percentage of your maximum unbooked profit.
Another method, favoured by chartists, is to pick bottoms from charts as they form during the day. You can see these in the chart which has been picked for this article. (Mahindra, 18th May 2021). Trailing stops were continuously raised as higher bottoms formed. Bottoms were selected only if the price remained above them for at least 30 minutes.
As the market approaches the closing, the 30 minute cutoff could be reduced. TS-7 is one such bottom which could be used as a trailing stop without waiting for 30 minutes.
Please note that the 30-minute interval is not a trading rule! You could pick your own number.
You will not catch moves like Mahindra's every day, but they are frequent enough to boost your profits. In this instance, we would get a 5% gain instead of just over 1%.
The chart shows two maroon lines at the start of the session. It is very likely that traders would have bought the stock and placed their initial stop loss somewhere between the two lines.
Do bear in mind that most day traders get negative annual returns. Various studies have shown that at least 90% make losses. So, day trading is certainly not something you should give up your job for!
To break into the 10% who do make profits, tweaks like trailing stops can make a significant difference. Risk and money management - not rigourously practiced by most traders - is another critical factor.
We have included day-trading strategies among the ones that work in the our online course, including live day-trading exercises. The course also has live exercises in a longer-term strategy : Momentum Investing. By having live exercises you can discuss your trades and other decisions and receive valuable feedback.