How Intraday Trading Works?

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Intraday Trading, as the name indicates, involves buying and selling the securities within the same trading day. Positions are taken based on the movements of prices of the securities and all the positions are squared off before the end of the trading day.

It is very different from investing or delivery trading (learn Intraday Vs Delivery trading here), wherein the positions are kept overnight, and much longer, and the deliveries of the securities are taken. It is a quick way to make profits and does not involve overnight risks, however, it involves multiple other risks and strategies that have to be mastered to be successful at day trading.

In this detailed review, we will discuss how intraday trading works and how you can build yourself towards it.

Day trading may look quite attractive to the beginners for the quick money, but it is not an adventure sport; it is a business and to that, a business that needs constant hard work, dedication and practice. There are only 4.5% of the intraday traders that survive and make something of themselves and those who do are the ones with 100% discipline.

It is a business that needs the trader to keep all emotions at bay; he/she must not be affected by emotions like greed and fear and must remain unaffected by massive profits and untoward losses.

For Intraday Trading to work for a trader, a well-defined procedure has to be followed, and the procedure needs to be tweaked and modified every now and then to adjust to the emerging market scenarios and the individual needs and understanding of the trader.

Understanding the Intraday Trading Basics

To be a successful intraday trader, one has to be in it completely. This is a path that you cannot detract from. The first and foremost step is honest self-assessment. A person has to understand all the pros and cons and know for sure that he has the will and capability to be a day trader as day trading requires long working hours, lots of emotional trauma, high-risk appetite and continuous learning.

Once you are ready for it, acquaint yourself with the basics of intraday trading. The beginner must study and analyse the securities market, what securities he wants to trade in like stocks, futures, options or commodities.

He must also understand the exchange timings, which will eventually affect his work timings. Along with this, he must have a clear purpose in mind-the purpose is to make money and prevent the loss of money. The decision to be taken also depends upon the capital available as the traders must know how much capital they can risk, along with keeping a cushion for the future.

Decide on the Stocks to trade in

A very important step to start intraday trading is to choose the correct and appropriate stocks to trade in. The trader must identify the sector and index he is interested in trading in and then make a list of all stocks in that sector and index. This requires research and analysis on the historical data.

Stocks picked up must have the potential to preserve capital, reduce risks and give returns. The thumb-rule is to choose very liquid stocks, i.e. the stocks that have a high average daily volume so that they are bought and sold in high volumes without affecting the prices much.

Also Read: How to Pick Stocks for Intraday Trading?

Day trading is anyway quite volatile, so the traders must avoid unpredictable stocks that trade in a volatile and unexpected manner. Alongside, it is important to choose stocks that have a good correlation with major sectors and indices so that they move along with the sector or index movement and are more reliable. The best way to function in intraday trading is to follow the trends.

In a bullish market, choose the stocks that have potential to rise and in a bearish market, choose the stocks which are likely to go down.

Research to find the best suitable trading tools

Intraday Trading needs a lot of hard work and discipline, however, the work can be made a little simpler by using the various intraday trading tools and technologies available in the market. Using the right trading tools is critical to the success of a day trader.

The intraday trader must do his research and find out the tools that are suitable based on his requirements and temperament. Trading platforms or softwares are available that 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.

Along with the platform, the day trader must learn how to study charts to his advantage and to make his trading decisions reliable and correct. An efficient trader must also study the technical indicators that give an analysis of the market and help in making correct decisions. After sufficient analysis and practice, the day trader can find out which technical indicators work best for him under which circumstances.

He can choose from options like moving averages, RSI, stochastic oscillator etc.

Work out a trading strategy

Once the technical know-how is in place and the trader has made a choice on what tools and techniques are to be used, the next step is to work out an effective trading strategy. Theoretically, there are numerous intraday trading strategies. However, the success or failure of a particular intraday trading strategy totally depends on the market.

A strategy may be working for the market conditions today, but may not work according to the next day’s market conditions. An intraday trader has to be very flexible and adaptable. He needs to keep practising the strategies and working on his skills, and constantly adjust to the new scenarios and adapt his strategies accordingly.

There are multiple strategies to be chosen from and the choice depends upon the market conditions, along with the personal profile of the trader. A day trader must define his entry strategy, exit strategy and escape strategy, along with the trading strategies.

Practise before making real trades

Now, the stage is all set. All technicalities are in place and the curtain is about to be raised. This is the real show-time. However. Before taking a plunge, a beginner must always practise on paper or on simulation so that he gets a hands-on experience of what he is actually going to face. It may all sound perfect, but day trading is not a perfect world.

The strategy that was sure to work may not work out when faced in the real world. So, it is imperative for the day trader.

Intraday Trading – The Process

Once all the aspects are taken care of, including the trader’s mindset, finances, goals, purpose, tools, technical indicators, research & analysis, strategy, and the trader has practised his game very well, the time comes for the real play. The day trader prepares for the market a day before and makes an analysis on the basis of the previous day as to what stocks are to be traded and what is going to be his strategy.

The price movements are observed by the trader and the most important derivation is the high/low price spread of the day. The intraday charts are studied carefully, taking different time frames, i.e. 5 minutes, 15 minutes, hourly, entire day; and the trader makes his entry into the market after understanding the correct time and price to enter the market.

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 shown below, etc candlestick shows the opening, closing, high and low of each 15-minute interval for the time period.

Charts are studied and 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. Along with the entry price, the day trader also decides upon his exit price and escape price.

Stop loss is also advisable to be marked in order to ensure that the loss is limited and the order is executed when the price reaches the stop-loss price.

Once the trades for the day are finalised at the end of the trading day, all trades are squared off and the ultimate profit or loss is realised for the day. There are no overnight positions so the profit or loss does not get carried over to the next trading day.

Thus, intraday trading works in a unique fashion. It is very different from any other form of trading, with its own ups and downs. Aspiring traders must be aware of the entire process involved in intraday trading as each step is crucial and unavoidable; and he must commit to learning each day, from his surroundings and from his own experiences to sustain, grow and evolve as an intraday trader.

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