What is Intraday Trading?
Intraday trading is the buying and selling of stocks within the same trading day. It is a type of short-term trading that takes advantage of price fluctuations in the stock market earning day traders handsome profits. However, to be successful as an intraday trader you need to possess technical know-how, financial wherewithal, and the risk appetite to make profits in intraday trading. Intraday trading can be carried out with stocks, foreign exchange, or commodities.
How does Intraday Trading work?
Intraday trading involves buying stocks when prices are low and selling them when the price is higher within the trading hours of a single day. To ascertain the right time to buy and sell stocks within a trading day, traders deploy different strategies to track the price movements of their chosen stock. Prior to executing intraday trades, traders research the stock they want to invest in not only looking at the financial statements or historical performance of stocks but studying the price charts of the stocks that track price movements of stocks on a minute to minute basis.
Intraday trading requires the trader to have a trading account but a Demat account is not required as delivery of the securities traded is never taken. Intraday traders enter and exit the markets before the close of the trading day. Thus there is no change in the ownership of the securities traded as all open positions are squared off before the trading floor closes.
Advantages of Intraday Trading
- Intraday trading can be carried out online on mobile and desktop trading apps. All you need is a trading account. You can pre-set target prices, stop losses, etc. on the application or platform.
- Intraday trading does not require large capital investment.
- You can potentially book huge profits and capitalize on the inherently dynamic nature of the stock market to make money in the short term. Provided you have a hold on certain basic principles of day trading and the risk appetite and financial bandwidth to back it up. There’s no guarantee here as well, so scope your risk-reward appetite before making a decision.
Intraday trading strategies
Intraday trading for beginners can be tricky if you don’t bear a few fundamentals of day trading in mind before participating.
Limit your trading capital
Intraday trading doesn’t require large capital investments. If your speculations pay off, you only stand to make money. But in case you lose money due to the unexpected turn of market trends, ensure that your loss is limited. Experts suggest that you should play with no more than 2% of your total trading capital on any given day while executing day trades.
Don’t follow the herd
Most beginners venture into intraday trading on the advice of friends, family, or coworkers who only have success stories to share on windfall gains made by intraday trades. It is tempting then to want to replicate the success of others and go by what everyone else is doing. That may work in your favor, but it is also possible that blindly following intraday trading tips dispensed by other non-professional or professional traders may land you in a sticky situation. Research the stocks you want to invest in thoroughly and decide for yourself how much you can afford to invest at what points you want to enter and when you want to exit.
Look at the numbers, ignore your intuition
Intraday trading is a game of playing the financial markets to make a potential profit. It is important to know the rules of the games. Price charts, stop loss, target prices, market trends, etc. are only some of the things you need to familiarise yourself with before you can begin trading. The approach to intraday trading should be tactical and not governed by intuition, in order to avoid losses. Indicators like the Average Directional Index and Relative Strength Index help you understand if stocks are being oversold or over-purchased and how to navigate your position. Open Range Breakout is another way to help you navigate entry points into a day trade by charting the highs and lows of the stock market in the opening hours of a trading day.
Understand the difference between trading and investing
Trading and investing are completely different investing approaches. Understanding how long-term value and growth investment work does not make you inherently adept at intraday trading. The rationale applied behind picking long-term investment does not apply to picking stocks for day trading. Long-term investments are made with the intention of riding out day-to-day market volatility whereas day trading capitalizes on market volatility to make a profit. Pick your stocks wisely.
Don’t get emotional
Emotions such as fear can trigger reactionary decisions in the day trader. It is important to not get swayed by unpredictable price movement and make a move to buy or sell to avoid losses or make more than you planned for. Make a plan and stick to it. Don’t get greedy or panic when market trends take a turn for the better or worse. Having a sound strategy and grasp on market indicators is the surest way to make money and avoid losses when price movements are unexpected.
Beware of brokerage
Compare the brokerage charges and exposure margins across different brokers before you start trading. Even though brokerage rates appear negligible, these charges add up when you take multiple positions and execute numerous transactions through the course of a trading day.
Intraday trading is a mixed bag of wins and losses. No trader gets it right every single time. Brokers, traders, investment bankers, and wealth managers provide good quality research and insights on the stock markets and projections for the economy. However, day trading requires a close personal interest and study of the historical performance of stocks and their price movements. Day trading requires paying close attention to the ups and downs of the market on an hour to hour basis and acting fast to close your position. Taking a balanced approach by adopting intraday trading tips recommended by experts and carrying out your own research and study into stocks and market trends is a smart way to venture into day trading.