Saturday, January 23, 2010

Advantages and Disadvantages of Futures & Day Trading

1) Leverage = you can trade upto 3-10 times the money you have in your pocket thus increasing the chance of earning by 3-10 times. (On the flip side, the chances of losing are also increased by that much. So, if you are "expert" you may make money very fast, otherwise you are destined to get badly mauled. Also, Even "experts" can be unlucky)

2) Low Cost = DayTrading and F&O have 10 times lower costs than delivery based trading. (On the flip side, the income tax on delivery based trading is 0-10% v/s 30% (depending upon your income slab)

3) Peace of mind = For the duration you are holding a position in DayTrading or Futures your stress levels are high. You tend to be nervous and insecure. you are unable to focus on life and its various facets (unless u r a PRO and you are fulltime into trading - which most of us are not). You tend to get sticked to TV (CNBC,BloombergUTV,ZeeBusiness,ETnow etc.) all the time, even after Indian market timings to see what is happening in the world markets.Quality of life is severely compromised. You start becoming short tempered and easily irritable. The time you give to your family gets compromised in quantity and quality. On the other hand, while you are invested, you are least bothered by day-to-day, week-to-week gyrations. You have a sound sleep

4) Risk = Risk in Futures (& Day Trading) are huge - often unlimited. If any big unfavourable news comes which suddenly shakes the market in the direction opposite to your position, you can be in serious trouble. Typical situations are when the stock or market catches the CIRCUIT. I remember, a lot of people who had aggressively shorted nifty futures went broke the day Congress returned to power in May09. Also, I remember a lot of people who were short on Tech Mahindra went broke the day it caught upper circuit. On the contrary, even those who had INVESTED in Satyam which plunged from 226 to 6 (yes 6) and held on, recovered to 126 last month. Very soon they will get back to 226 and even more. no investor os Satyam (who waited) went bankrupt

5) Returns = If you pick a stock (delivery based) at the right time when it is about to shoot / breakout , which many are doing successfully in Mudraa, then you can make more than what amateur Day Traders or Futures players make. On an average I have seen that amateur Day Traders and F&O players win 12 out of 20 trading days a month while 2 times out of remaining 8 non-profit days they lose big. They move 5 steps ahead and 3-4 steps back, at times even more. On the contrary, if you position trade or invest in a good stock at the right time and wait for 1-2-3-4 weeks, you are likely to make huge returns. In DAy Trading we often miss out on the big overnight moves which otherwise are lopped up in positional swing trading and investing

I seem to be in exces favour of Investing and Positional trading and against Futures and Day Trading and I must admit that. Only Professionally trained or exceptionally gifted fulltime talents should do speculation. Remember, if you know driving a car is a blessing, otherwise it is deadly for you and others.

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