Intraday means ‘within the day’. Hence, intraday trading refers to trading stocks and ETFs during regular trading hours within a single day. You can buy or sell shares within a short period, without having to undergo the tedious process of availing physical share certificates. Intraday trading works on the concept of price movement. You buy shares when the price is low and sell them when the price rises. The difference in both the rates amounts to the profit earned.
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 capitalises on market volatility to make a profit.
With the basics in mind, let us take a look at how to do intraday trading in India.
Choose liquid stocks: Day trading requires you to square off the position before the end of the day. If you buy a stock which doesn’t have enough liquidity, you may not be able to sell it when you want to exit. Dealing only in liquid stocks is one of the basic principles of day trading. Adequate liquidity ensures that there is no limitation on the trading volume. Liquid stocks have many buyers and sellers which leads to volatility in the stock price and day traders need volatility to generate profits.
Research before starting: The potential for profits is high in day trading, but so are the chances of loss. Before initiating trades, conduct thorough research and zero in on the shares you want to trade in. Select stocks from a sector you have an understanding of. After finalising the shares, monitor their price movements for some days, along with other metrics such as volume and liquidity before initiating trades.
Choose stocks that move with the market: Price movements can be triggered by various reasons, however, there are certain stocks that mirror the movement of the broader indices. For instance, if the Nifty rises these stocks will rise and vice-versa. A bulk of stocks, however, do not have a set pattern and hence one should be cautious while dealing with them.
Recognise the correct price: For an intraday trade to be profitable, you will have to determine the correct price for entry and the right price to exit. Traders employ different strategies by using support and resistance levels to determine the right entry and exit prices. Some traders square off their positions as soon as the trade becomes profitable, while others ride the momentum. Your strategy may differ, but always be disciplined and stick to the plan.
Set a stop-loss: Brokerages provide substantial leverage for intraday trading, which increases the potential for profit and also for loss. The loss during day trading can be huge, which makes setting a stop loss very important. A stop-loss limit automatically cuts your position as soon as the share price crosses a pre-decided level.
Move with the trend: It is advisable to move with the broader market trend while day trading. When the market is bullish, going long may be a good idea. On the other hand, if the market is bearish, you can go short or wait for stocks to bottom out before entering.
Basic Rules for the Intraday Trader
There are some simple rules that will ensure that a beginner intraday trader can maximise their chances of garnering a profit and minimise losses. These rules include:
- Invest small. You may like the thrill of the stock market but it is unwise to put a significant chunk of your earnings in intraday trading. Put in only that amount that you can afford to lose. Don’t let beginner’s luck or the profits of seasoned traders lure you into putting in more money than you can afford to.
- Always square off your trades at the end of the day. Do not hold onto securities in the false hope that you will get more profits or less losses the next day.
- Keep an eye on the market at all times. You cannot be in business meetings all day or on long flights while the market is on. You need to be vigilant and quick to make the trade when the price is right. You may lose out on a good selling price if you are not monitoring the rise and fall of your chosen stocks.
- Exit as soon as you realise the market has turned unfavourable. Do not wait for the stop-loss conditions to trigger as that may be too late and you may register more losses.
- Do not invest in too many markets at once.
- Pick your market on the basis of the amount of capital you have. Typically, the currency market requires the least amount of capital to trade, while stocks require slightly higher capital amounts.
- Find the right time for your intraday trading and follow that routine religiously.
- With time and experience, work on formulating a proper intraday trading strategy and keep implementing it. The key to intraday trading is to find a strategy that works for you and keep repeating it to maximize profits.
- The best stocks for intraday trading should be high liquidity and have medium to high volatility. For a beginner, it is best to begin by focusing on one or two stocks at a time.
To begin with, Traders use real-time charts to identify the intraday price movement. Along with price monitoring, there are several other tools that help in making your initial trades successful.
Here is a guide of moves and strategies that will help you profit while doing intraday trading:
Advantages of Intraday Trading
There are many pros of day trading in the stock market. Here are some of the key advantages.
1. Instant Earnings
Unlike long-term investments, you can get earnings from day trading almost instantly. Once you exit your trade, depending on your strategy and performance, the profit or loss will be directly reflected in your trading account. You can choose to either reinvest the profits back into your trading capital pool or can withdraw the same by transferring the funds to your bank account.
2. No Overnight Risk
With day trading, as you would not hold your stocks overnight in the market, you can avoid the risk of overnight fluctuations. Many times, the stock price changes between the close of the market and the opening of the market due to news and other sources. This fluctuation can affect the stock price.
3. Make Profits in Bear Markets
A key advantage with day trading is that you can make profits in a bear market as well. Instead of buying a particular stock, you can short sell a stock and buy them later to make profits. You can thereby make profits in both rising as well and falling markets. This advantage is usually not available for investment options.
Disadvantages of Day Trading
There are a few cons of day trading too. Here are some of the disadvantages that you should be aware of. Make sure to keep these disadvantages in mind so that you can steer away from them to be a profitable trader.
- Risk During Volatile Markets
- Requires Consistency
- Risk of Losing Capital
How to Get Started with Intraday Trading
To begin trading in the stock market, you need to create a trading account and a DEMAT account. If you are a trader who is familiar with the stock market and would like to try intraday trading, you could open a new account to keep your intraday trading separate. Keeping separate account makes it easier to keep track of things. Intraday trades are taxed differently, so keeping a separate account makes tax calculations hassle-free.
You can then sign up for the right tools that help with intraday trading. After you have created an account, you can get some tools to assist you with intraday trading. Before you begin trading, you should spend some time examining daily charts so that you can familiarise yourself with the patterns of price movement. There are various tools that provide technical analysis and these might prove to be useful too.
Types of day-traders
Primarily, there are two types of intraday traders- independent traders, and traders working for an institution. Majority of the day traders who make a living from intraday trading are tied to larger institutions. This provides them with certain benefits the institute offers, like a direct line, trading desk, good capital, and analytic software. They target opportunities that provide them easy profits, and the resources they have also help them utilise safer trading opportunities.
Individual traders have two options- helping other people manage their money, or using their own capital for trade. They often have connections with a brokerage, and can access other resources.
Intraday traders need access to some high end instruments and financial services. These are-
Access to a trading desk – This is usually limited to the traders who work for big institutions, managing large bulks of money. A dealing desk helps intraday traders to execute orders instantaneously, which is a necessity during times of rapid price movements.
Numerous news sources – The news is a vital tool for intraday traders, and provides most of the opportunities for capitalization. So, when something significant happens, you have more opportunities to utilise it if you get to know about it quickly. A typical trading room will receive constant coverage of various news channels, and might have software that analyzes the news to detect important stories.
Analytical software – Trading software will also give you an edge over the others. Some traders rely more on technical indicators than on news. Automatic pattern recognition, genetic and neural applications and back testing are some of the software traders use to analyse data.
What Are The Traits That Make A Day Trader Successful?
Knowledge and experience – While skills of technical analysis and the ability to read charts are handy skills to have, you need to understand the market to make sense of the data you retrieve through analysis. Take the time to diligently understand the nature of the product you are trading in.
Sufficient capital – As a day trader, you should only invest the amount that you can bear to lose, which is called the risk capital. Restricting yourself in such a manner helps shield you from a financial crisis, and also prevents you from taking emotionally charged decisions.
If you want to harness the price movements in intraday trading effectively, a sufficiently large capital is often required. Since unexpected swings can result in margin calls without sufficient warning, if you have the means to access a margin account, it can prove to be beneficial.
Strategy – As a trader, you need to have something that gives you an advantage over the market. There are different kinds of strategies you can use, some of which are described in the next section. You should work on these strategies, and hone them until you find a way that works for you.
Regardless of the strategy an intraday trader uses, they will usually target a stock that fluctuates a lot.
Discipline – Many traders lose money because they do not stick to their own criteria while choosing trades. Intraday trading depends heavily on the volatile nature of the market. A stock might catch the eye of a trader if its price fluctuates a lot during the day.
Day traders also prefer stocks that are highly liquid since they can change their positions freely, without affecting the price of the stock. When the price of a stock soars, traders tend to adopt a buying position. If the price goes down, you may opt to short-sell it so that you can profit from its fall.
What are the Strategies you can use for Intraday Trading?
An intraday trader can choose between many strategies like swing trading, trading news and arbitrage. These strategies have been refined so that they can result in reasonably consistent profits and minimize the losses.
Here are some strategies explained-
- Scalping-This tries to make miscellaneous small profits on minor price fluctuations in a day.
- Range trading– Range trading makes the decisions of buying and selling by basing them primarily on support and resistance levels.
- News-based trading– This technique is the timely use of the volatility news events create to grab lucrative trading opportunities.
- High-frequency trading (HFT) –These strategies apply complex algorithms to make use of brief lapses in market efficiency.
Intraday trading offers traders numerous benefits, so it is really no wonder that so many people are tempted to try it. Intraday traders are important in keeping the market liquid and efficient. If you have the resources, and are willing to work on the skills, you could become a successful intraday trader too.
What is the intraday cash limit?
It measures the limit of your exposure in the market.
You can trade during intraday trading for the value of cash in your account. If you have funds to buy shares, you can hold stocks for long and short terms.
Which chart is the best for intraday trading?
It is a good practice to look for confluence in different charts to base your trading decisions. Popular intraday charts used by technical traders are,
- Line charts
- Bar charts
- Bar and Candlestick charts
- Candlestick charts
- Tick charts
- Renko charts
- Volume charts
- Point and Figure charts
Which time-frame is the best for intraday trading?
You must select a time frame based on your trading style. You can choose from a 60-min chart, daily chart, 15-min chart, and even a tick chart. However, most traders use the 1-hour time frame to decide their position.
What is the cut off time for intraday transactions?
The cut-off time for intraday trading is given at 3:10 pm to 3:15 pm. Traders can start trading as soon as the market opens at 9:15 and continue trading throughout the day until 3:15 pm.
Can I hold intraday-shares?
You can hold intraday shares until the closing hours of the day. After that, the shares will automatically square off or will get delivered to your account. You need to ask the broking house about their policy regarding intraday shares.