What is intraday trading?
The term ‘intraday trading’ refers to the trades that are made within the day. In intraday trading, buying and selling of stocks are made on the same day, before the market closes.
All the intraday positions have to be closed before the market closes. In case a trader fails to close your intraday position, your broker will square off your position or convert it into a delivery trade.
Advantages and Disadvantages of intraday trading
- Small capital investment because investors get leverage (margin) on the stock.
- Investors can take long and short positons on their trades and maximise their profits.
- It eliminates the overnight risks of the stocks.
- Intraday investments are not long-term capital investments.
- The higher leverage the higher losses.
- It requires much more attention from investors and can be stressful at times.
8 Intraday Trading Secrets For Day Traders
The main problem of intraday investors is that they trade with their emotions. Investors involved in intraday trading must understand that they should have no emotion towards the market while trading.
Investors should trade like a computer that takes command without any emotion. Like a computer, investors should exit the trade when their stop-loss is hit, rather than waiting for the market to turn as per their will.
Tips for intraday trading investors should know
- Trade in the liquid stocks that have some movement: Often investors don’t pay attention and invest in illiquid stocks rather than investing in liquid stocks. Thereby, when investors buy or sell their illiquid stocks, they don’t find sellers or buyers in the market. Therefore, it is advised to trade in liquid stocks.
- Trade in small quantities: Always trade in small quantities. In intraday trading, investors can take leverage in stocks which results in higher losses. For example, you are willing to risk Rs.10,000 your loss can reach up to Rs. 40,000 in intraday. Therefore, never trade in large quantities.
- Always apply stop-loss and limit orders to trades: It’s a no-brainer to apply stop-loss and limit orders in the trades. Never keep the stop-loss and limit in mind, rather keep it in the system.
- Exit the trade once preset profit is reached: Every intraday trader will relate to this point that traders become greedy once they book profit in day trading. They try to make more profit in intraday so they make more trade resulting in losing some extra money from their pocket. It is advised to leave the marketplace once the preset profit is reached.
- Lose less and walk out: Same as the previous point, traders should leave the trade when they book some loss. Do not try to recover your loss.
- Never average on the losing side: In intraday, never average on the losing side. It means if the share is falling, do not buy more and vice versa.
- Reduce noise: Do not trade on tips and news.
- Check for the previous trend: Most traders do not pay attention to the previous day trend of stocks. Check for the previous day performance of the stock.
Liquid And Illiquid Stocks
Liquid stocks are those stocks that are easy to sell because a large volume of shares is available to trade.
In illiquid stocks, the gap between buyers and sellers is so large that exiting from a trade gets difficult.
5 tips on how to do intraday trading
- Do not trade in the first 15 minutes if the stock has a gap up or gap down opening.
- Most traders buy when open is equal to low or sell when open is equal to high. But do not trade in the first 10 minutes, as most of the time the market give a false breakout.
- Focus on a few stocks and check the technical chart of every stock to understand their price movements.
- Some websites provide intraday trading tips. Trader on Chart has been a game-changer for many traders. It allows you to pre-set your trade details like lot size, stop loss, take profit, breakeven point, trailing stop, etc.
- Traders should use technical charts on different timelines to understand stock movements accurately.
Here are some important trading patterns intraday traders must follow.
Which indicator is best for intraday trading?
Indicators are beneficial for every intraday trader. Following are the few indicators investors should follow.
The moving average is one of the most common indicators used in intraday trading by traders. A moving average represents the average closing rates on a line on the stock chart over a specific period. Usually, a crossover of the 50-day moving average by either the 10-day or 20-day moving average is regarded as significant.
Bollinger Bands are envelopes plotted at a standard deviation level above and below a simple moving average of the price. The Bollinger Bands uses 2-parameters Period and Standard Deviations. The default values are 20 for Period and 2 for Standard deviations, but these are customizable.
Bollinger Bands indicator has three lines – moving average, upper and lower standard deviations. It allows you to locate the price variation of the stock over a period.
Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a scale that measures the speed and change of price movements. It was developed by J. Welles Wilder. The RSI scale ranges from 0 to 100. Generally, if the RSI value is less than 30, the stock is considered as underbought and when RSI is over 70, it is considered as overbought.
Moving Average Convergence Divergence (MACD)
Moving Average Convergence Divergence (MACD) is a popular and widely used technical analysis tool developed by Gerald Appel in the late 1970s. MACD is a combination of three series – the MACD series proper, the “signal” or “average” series, and the “divergence” series, which is the difference between the two. MACD series is the difference between a “fast” (short period) exponential moving average (EMA) and a “slow” (longer period) EMA of the price series. The average series is an EMA of the MACD series itself.
FAQ related to day trading
Most investors prefer MACD for intraday trading as it provides reliable information on trend direction, momentum, and duration. However, one should not rely on a single indicator. The best is to use a combination of MACD, RSI and Bollinger Bands.
Here is a list of suggested books for intraday trading
1. Price Action Trading: Technical Analysis Simplified
2. How to Make Money in Intraday Trading
3. How to Make Money Trading with Candlestick Charts
4. Trading and Technical Analysis Course
5. Trading in the Zone
To select intraday trading stocks, you have to analyse stocks one day before the market open (after the market closes).
1. Select the top gainers/losers stocks of today to trade tomorrow, as these stocks have a higher chance to perform tomorrow.
2. Analyze selected stocks on multiple timeframe charts.
That is how to choose stocks for intraday trading in India.