Intraday trading implies buying and selling of securities on the same day, during the exchange trading hours. The securities are purchased not with an intention of investment, but with the intent of harvesting profits due to the price fluctuations throughout the day. It is a challenging domain.
It requires consistency, patience and very accurate knowledge of the market and market trends. Intraday traders operate with the highest levels of risks and participate in volatile market conditions.
Intraday Trading is different from Delivery trading
When the securities are bought and sold on the same day and the orders are squared off before the end of the trading day, it is called Intraday Trading; whereas when the securities are bought and held overnight and taken delivery of, it is called Delivery Trading.
These are the two modus operandi to operate in the market. The purpose or intent behind both forms of trading and the risks involved and capital required varying in intraday trading vs delivery trading. Both have their own pros and cons.
In intraday trading, the intent is to make quick profits, with no overnight risks, but high risks due to price fluctuations in the day, it requires less capital and involves less brokerage and short selling of securities is possible; however in delivery trading, capital required is high as full payment has to be made upfront for the securities and it involves high brokerage but there are other benefits like rights issue and dividends.
Both intraday trading and delivery trading are efficient ways to deal with the market. It is the requirement and purpose of the trader that makes him decide which route he wants to take.
Risk Management in Intraday Trading
Intraday trading has very high returns on investment, but along with the high returns come high risks. Intraday trading is not safe, especially for novices. Intraday trading is at the top of the risk spectrum and is not safe.
For intraday trading to become safe, it takes a lot of expertise, experience and rationalism of the trader, which comes after years of practice and dedication. Risk management techniques are of paramount importance. Risk management techniques used by successful traders are some of the following:
Choosing the stock wisely
Following an effective strategy
Booking profits regularly
Using stop loss
Being aware of how much to risk
Intraday trading is not safe and along with making profits, the primary objective of an intraday trader is to reduce losses.
For an established intraday trader, the decision making comes on its own with time and they become experienced in making judgement calls and predicting trends; however, for beginners, they are mostly dependent on the various tools available to make an informed and profitable decision.
Intraday trading is riskier for untrained traders, but if they keep a vigilant eye on the market trends and the indicators, they can reap huge profits. This, of course, needs a lot of hard work and discipline, however, the work can be made a little simpler by using the various tools and technologies available in the market. Using the right trading tools is critical to the success of a day trader.
The various tools available for intraday trading are:
Trading Platforms: Trading platforms provide in-depth information about the volumes being traded, prices at which they are traded, bid-offer range, and make ladders to give an accurate picture to the trader. The trading platforms make a personalised risk profile for the traders based on their risk appetite, net worth, investment objective etc., derive signals based on fundamental and technical analysis and also execute the trades based on these signals.
Charts: Charts give detailed information about the opening, closing, high and low of the security trade in the defined time interval. For instance, in the 15-minutes intraday chart shows the opening, closing, high and low of each 15-minute interval for the time period.
Technical Indicators: Technical Indicators are used in conjunction with the charts to get a deeper and more useful analysis. These indicators predict the future prices, or the price direction, by looking at the past patterns. Some commonly used technical indicators are moving averages, Bollinger bands, RSI and Stochastic Oscillator.
Live News Feed and Live Radio Feed: The most critical factor in intraday trading is the short-term trade and the immediate effects that are brought about by the market on the price movement of securities. In order to capture and harvest the opportunity, the intraday traders have to stay abreast with the breaking news and obtain this news real time so that they can predict or calculate the effect of the news on the prices of securities and take an action or position accordingly.
The intraday trading strategy to be used also depends upon the traders’ personal trading styles, along with being dependent on the market conditions. Some traders are very active and do many trades a day, with large position sizes, catching even the small price movements; while there are others who trade only on specific news events or only on tendencies that they have well researched.
So, a strategy that works for a very active trader may not work for a less active one and vice versa. Some of the important intraday strategies are as follows:
Momentum Trading Strategy:In momentum trading, the traders focus on stocks with momentum, i.e. the stocks that are significantly moving in one direction and in high volume.
Reversal Trading Strategy: In the reversal intraday trading, the traders look for the stocks that are the extreme highs or lows and thus have a great snapback potential. As soon as the security begins to reverse, a stop is marked and trailing stops are used to stay in the trade for as long as possible.
Gap and Go Trading Strategy: The gap and go strategy traders look for gappers and as a thumb rule, take a position in the same direction as the minor trend. They try to earn profits before the gaps are filled due to the establishment of an equilibrium.
Pull Back Trading Strategy: In a pullback intraday trading strategy, weaknesses are bought and strengths are sold. Securities that are up trending will pull back giving a low-risk buying opportunity, and securities that are down trending will go up offering a low-risk selling opportunity.
Bull Flag Trading Strategy: Bull Flag, in particular, shows a strong price hike which reaches its peak and then pulls back in an orderly fashion where the highs and lows are almost parallel to each other. Bulls flags are violent in the beginning as the bulls cause a breakout and blindside the bears.
Moving Average Crossover Trading Strategy: It a price crossover strategy. When the price of a security goes above or below a moving average, it signals a potential change in trend.
Breakout Trading Strategy: Break out trading means entering the market when the price moves outside a particular price range, its own support and resistance. It is accompanied by an increase in volume.
Various strategies are available to be used by the intraday traders, but the use of the correct strategy at the correct time is the key.
To be successful in intraday trading a lot of discipline is required. Rules have to be formed and abided by at every given time, in every given trade. These rules are not mandatory to be followed, but of course, they are quite valuable. Day trading may present the traders with many heats of the moment scenarios, as intraday trading is very fast-paced.
In such scenarios, the traders may be tempted to let go of the rules and follow their eyes and ears, but that usually results in disastrous results. As a bottom line, intraday traders have to be very quick and on their toes, along with making sure that they do not flow away with the moment and still stick to their rules. The golden rules to be adhered to during intraday trading are:
Trade with the current market trend
When the market is bullish, an intraday trader must choose the stocks that have potential to go up and when the markers are bearish, he must look for stocks that may go down. Quick reversals in trends also occur in day trading, and these reversals have to be carefully observed, spotted and followed.
Keep the emotions at bay
An intraday trader must keep his emotions at bay and not be overly affected by either the profits or the losses. A day trader must be patient and should wait for a pullback so that he has a low-risk entry and exit.
Follow a trading plan
Start with knowing whether you should do day trading or delivery trading, make an elaborate plan for intraday trading. Strategies must be practised and then the most suitable ones must be picked. There must be a plan before the start of each trading day and journals of profits and losses must be kept to keep a track of whether or not the strategy worked.
A disciplined intraday trader goes slow when the market is choppy and may even not trader when the market is horizontal and does not trade till the market is stabilised. Make sure that the range of movements of prices is high enough so that the rewards exceed the potential risk. Don’t trade when the market is not moving.
Market positions with limit orders and not market orders:
In a limit order, the maximum purchase price is set for a buy order and a minimum selling price is set for a sell order; so if the market does not reach the limit price, the order is not executed. Therefore, to ensure that there are no untoward losses, it is highly advisable to set limit orders instead of market orders.
Never stop learning:
Intraday trading is a job where learning never ends. Each trade and each aspect of trade teaches something new. An efficient intraday trader must be very open-minded to new learnings.
Trade only with the capital that you may risk to lose
A critical rule of intraday trading is to not be reckless. So, for a seasoned and successful trader, it is very important to be aware of losses and put in only the amount of money that they can afford to lose.
Use strict stop loss
Stop loss helps to stop the losses at a particular point and it covers the position if the price moves beyond a specific limit. Thus it does not let the trader be carried away by emotions and the movements and the capital is kept safe and enormous losses are avoided by using the stop loss.
As a bottom line, intraday trading is a unique game!
It requires a very different set of qualities, qualifications and mental set up. It is not a possibility for everyone who gets into intraday trading to be successful. Statistically, only 4.5% of the intraday traders are able to survive long term. However, if one wants to try intraday trading and be good at it, it is necessary to be dedicated, hard-working, consistent and very open to learning. You can make your own informed choice!
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