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Short Term Trading – How Can I Generate Regular Income

In the stocks section of my blog, one of the most common queries is “Can I Generate Regular Income From Short Term Trading”.  For sure the Answer is YES but million dollar question is how? Here i am not claiming that i am an expert in this but i can say that i did a lot of study on this subject. Different people have a different opinion on this subject. As i keep sharing that for an investor the big fight is between fundamental analysis vs. technical analysis. Under each of these types, there are thousand of permutations and combinations :).

During my MBA days, one of my professors used to tell us that too much analysis leads to paralysis. I agree now :). The biggest problem with each of this analysis is that finding the right combination/mix comes at a cost. For example, during analysis no 1, i lost Rs 20,000 and during analysis no 4, i lost Rs 12,500. Thankfully, i recovered some of these losses during other analysis.

I would like to clarify that the investors who know how to generate regular income from short term trading will never reveal their success mantra to anyone. They make huge money out it. A couple of year’s back i approached three such people whom i knew personally. They were making at least a Lac per month from the trading/investment during that time. Today they are earning min 10 Lac per month. They have a secret base of clients who are willing to pay hefty fees for their tips. The reason being, they fear regulatory crackdown as they are not SEBI registered investment advisers. I shared a post on stock tips i.e. Stock Market Tips – Business of Selling Dreams.

Types of Investment/Trading

In my opinion, at macro level, you can divide stock investment into 3 parts i.e.

  1. Intraday Trading
  2. Short Term Trading
  3. Long Term Investment

For long term investment, mutual funds are the best option. The reason being retail investors are not good in booking profit at right time. I shared this problem in my post, why it is imp to book profit in Stock Market? For example, i identified and bought a Stock at Rs 180 for the long term. It reached Rs 280 in one year..Wow!!! I should have booked profit but greed resisted me. There are certain hidden factors that signal a SELL and retail investor is not able to identify these factors. The mutual funds are managed by professionals and good fund managers are right most of the times. Now after 2 years the stock is back to Rs 190. Always remember the law of gravity, whatever goes up definitely comes down :). It is true for your stocks also.

Reg intraday trading, In a one-liner, let me admit intraday trading is not my cup of tea. It is too risky and volatile to handle. Only seasoned traders can handle this.

Lastly, Short term trading is to buy stock expected to go up in short term because of momentum. Here short term can be 1 day/3 days/ 5 days or even a month. Personally, i wait for only 2 weeks. If there is no movement then better to quit. Another reason is i have limited capital to deploy and don’t want to risk too much money. If you identify such stocks at right time then you are home. Here i would like to clarify, i am not referring to news based stocks. I never suggest buying stocks based on news. Please remember that news is out when the party is over. Sometimes it is part of stock manipulation to provide an exit for existing investors.

How can i generate regular income from Short Term Trading?

The answer is very simple and i already shared. Either you identify any stock broker who offers accurate stock tips/recommendations. Personally, i observed that almost 99% of these stock tips are part of Stock Manipulation. The traders accumulate Stock A and jacked the price from Rs 50 to Rs 90. Now is the time to book profits but they need buyers to book profit as they will turn sellers. Therefore, with the help of stock brokers, a buying tip of Stock A will be floated among the clients.

I am not saying 100% tips from stock brokers are wrong. To keep paid clients in good humor, fake tips are normally 2 out of 10. The stock broker may receive money for this kind of recommendations. Therefore, there will be buyers of stock A and traders will exit the stock after booking profit. At the end of the day, retail investor will lose money in the stock market.

The second approach is DIY (Do it yourself). I personally believe in this approach but most of the people are not comfortable in analysis part. I trust my own analysis. The second problem is the conclusion of the analysis. There is a famous saying that if you give the same set of ingredients of same quality and in same quantity to 5 different people. The dish will taste different in all 5 cases. The same goes for the stock analysis. You give the same set of data to 5 different investors and the conclusion of all 5 will be different. Therefore, besides analysis, the conclusion of the analysis is also critical.

I observed that in order to make a regular income from short term trading the strike rate should be min 66%. In other words, out of 3 stock tips, the 2 should work in your favor. Now, why 2 should be profitable. The reason being one profit making stock will balance the one loss-making stock assuming you invested an equal amount in all 3. The balance profit-making stock will help you generate a regular income. This was just an example. You always need 20-30 floating stocks in your portfolio to make regular income. If the strike rate is 50% then the game is over and it becomes the law of probability i.e. out of 4 recommendations, the probability of predicting up-move in 2 stocks is 100% :). I target a strike rate of 75% for my portfolio but the threshold is always 66%.

How i Select Stocks for Short Term Trading?

Before i proceed, let me clarify that i am not a SEBI Registered Investment Adviser. Therefore, i have my own limitations to sharing a set of information & knowledge with the readers of the blog.

Please note that real test of the short term trading is when the market is on a downward trend. 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 1699 stocks listed on NSE. One fine day when the NIFTY dropped by 1% that is huge fall. Out of 1699, there were 318 advances, 82 unchanged and rest 1299 declined. Therefore 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:

It is no brainer that price movement is most crucial for a stock. Let me admit that price movement is difficult to track and predict. The reason being, profit booking start after Y% run-up. Therefore, you can keep track of X no of day’s price movement to establish the price movement. Based on my experience i can say that wide data range is suitable for long term investment. For short term trading, a data range of 3 to 5 days suffice.

2. Volume:

In my opinion volume trend is very tricky to predict. Recently while doing analysis i observed that the volume is on increasing trend over last 7 days. When i compared with 30 days average, the 7 days volume was just 60%. Therefore, it shows sharp drop during last one month and last 7 days was just recovery from lows. In my opinion, to conclude volume trend for short term trading, you should compare 3 days, 7 days, 14 days and 30 days average volume to identify a trend.

3. Delivery Percentage:

I discussed this point in detail in my post, How to analyze security wise delivery position? Delivery volume is quite misleading. For any serious buying in the stock, you should check the delivery percentage. You should monitor 3 days, 5 days and 7 days average delivery percentage. Here the catch is some stocks are traders stock and others are investors. For example, average delivery % of Stock Z is around 85%. It shows increase to 91%. In this case, it is not a BUY signal as such. On the contrary, a Stock with average delivery % of 65% shows an increase and jump to 90% plus then something is cooking up :).

Again to clarify that same set of data can throw multiple conclusions. Therefore, the conclusion of the analysis is most crucial.

In my next post, i will share some of the golden rules related to short term trading. It will be based on my learning. As i also receive queries from readers about my stock portfolio. I update my stock portfolio on daily basis and you may check the same through the following link

My Stock Portfolio

Please note that i am not suggesting or recommending that you should buy the stocks on my radar. The objective of this sheet is just to share my knowledge and information with the readers i.e. my short term trading stocks. Kindly check the disclaimer section on the spreadsheet.

Copyright © Nitin Bhatia. All Rights Reserved.

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7 years ago

Thanks for insightful article. To add: Greed, Fear, Hope, Regret are the 4 horsemen killing most traders in stock market.

People come here with unrealistic expectations inspired by dream of getting rich faster but truth is always bitter. Market follows pareto principle of 80:20 where 80% people loose money to rest 20% professionals. As per my experience, Behavioral Psychology plays pivotal role in trading success. Most of the amateurs keep searching for holy grail of stock market which never exits. Market is stern teacher to those emotional kinds. Swift execution is mandatory to lock profit or minimize losses but those busy with other jobs finds it difficult despite good trade.

Personally, I prefer only Nifty Futures as trading vehicle due to highest liquidity, lowest spreads, natural movements; unlike stocks which are fabricated by market movers for vested interests.

7 years ago

Sir, have u stopped updating your stock portfolio?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  VSN

Yes. I am not able to do it regularly due to time constraint. My apologies for the same.

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