What Is Intraday Trading?
Intraday trading, also known as day trading, involves purchasing and selling securities listed on a stock exchange on the same day. The primary purpose of transacting in this method is to realize capital gains on purchased securities as well as minimize risks by keeping money invested for an extended period. In intraday trading, all positions must be squared off before the market closes on the same trading day. This trading style requires quick decision-making, technical analysis skills, and the ability to capitalize on short-term price movements. Intraday trading is popular among active traders who seek to profit from market volatility within a single trading session, typically lasting from 9:15 AM to 3:30 PM in Indian markets.
How to Do Intraday Trading
Successfully engaging in intraday trading requires understanding key characteristics of suitable stocks and implementing proper strategies. Here are essential factors to consider when selecting stocks for intraday trading.
Choose Highly Liquid Stocks
Liquidity is a prime feature of intraday stocks, as without this feature, such trade would not be possible. Equity shares of small and mid-cap companies can be easily bought and sold, as well as experience tremendous volatility due to market fluctuations. The cyclical variations should be carefully observed by analysing 52-week high and low values.
Volatility Analysis
Best intraday stocks tend to possess medium to high volatility in price fluctuations. Generally, market value fluctuations more than 3% should be avoided while performing intraday trading, as the possibility of incurring a loss is huge in case of an adverse downturn in the stock market.
Strong Correlation
It is ideal to purchase an intraday share having a high correlation with a benchmark index of a reputed stock exchange. Substantial movement in share prices can be observed when index value tends to fluctuate, allowing capital appreciation through intraday trading.
Higher Trade Volume
Intraday investors can track the trade volume index of a particular security to identify price fluctuations. A higher trade volume index reflects either excessive demand or supply, depending upon an underlying company's performance. Capital appreciation gains can be earned through both purchase and sale transactions.
Benefits of Intraday Trading
Lower Risk
Since securities are purchased on the same day in intraday trading, risk of incurring substantial losses are minimized. However, in case of standard trading wherein the principal is kept locked in for a considerable period, changes in price can be significant, making an investor worse off in case of stock market downturns.
Lower Commission Charges
Stockbrokers charge nominal fees while transacting in intraday trading stocks, as delivery expenses of transferring security in the name of an investor are forgone. Stock transaction tax, trade fees, services tax, etc. are all-inclusive in brokerage fees. Generally, brokerage fees on intraday trading stocks are one-tenth of what is levied if standard trading is undertaken.
Higher Profits
Intraday trading is known to yield massive wealth creation for investors, provided accurate investment strategies are applied. Capital appreciation in a rising stock market can be achieved easily. In case of adverse market conditions, intraday share traders use the method of short selling to earn profits.
Liquidity
Another benefit of intraday trading is that total financial resources invested can be quickly recovered at any time. It is not blocked through an asset purchase transaction. This preserves liquidity requirements of an investor to meet any personal needs.
Capital Gains Through Market Fluctuations
Investors can profit through intraday trading in both bullish and bearish markets, depending upon the investment strategy adopted in such situations. Capital appreciation in a bullish market can be achieved by purchase and sale of securities. In the event of the stock market downturn, profits can be generated through short-selling financial instruments.
Associated Risks
Intraday trading comes with significant risks that investors must carefully consider. Understanding these risks is essential for making informed trading decisions.
| Risk Factor | Description | Impact |
|---|---|---|
| Market Volatility | Unexpected market fluctuations can lead to losses | Can result in substantial losses if market moves against position |
| Extensive Knowledge Required | Need extensive knowledge about intricate workings of stock market | May seem overwhelming for novice investors, leading to poor decisions |
| Technical Analysis Limitations | Technical analysis based on past volatility may not be 100% accurate | Past performance doesn't guarantee future results, leading to potential losses |
| Time Commitment | Requires constant monitoring throughout trading hours | Demanding schedule requiring full attention during market hours |
| Emotional Control | Requires strong emotional discipline to avoid impulsive decisions | Emotional trading can lead to significant losses and poor decision-making |
Tips to Follow for Intraday Trading
Research
Thorough research and analysis of the present market scenario, company fundamentals, and knowledge of macroeconomic factors, such as the country's debt status or currency movements, is essential for successful intraday trading.
Invest the Extra
Intraday trading is fraught with danger. It is recommended that you only invest what you can afford to lose. Never risk money that you need for essential expenses or long-term financial goals.
Don't Overtrade
The stock market does not always follow a predictable pattern. The best way to approach intraday trading is to trade only a few scripts at a time. Focus on quality over quantity to manage risk effectively.
Performance Evaluation
Intraday trading is fluid. Keeping track of your results - wins and losses - will help you understand what worked and what didn't. Past performance evaluations will assist you in making better trading judgments in the future.
Alternative Trading Methods
Investors wary of intraday trading in the stock market can choose from various trading methods that offer different risk-return profiles and time commitments.
Standard Trading
Under this trading method, individuals can invest in stocks of different companies for a more extended period, profiting from both capital appreciation and periodic dividend payments. Brokerage firms provide advice regarding most profitable investable securities.
Momentum Trading
Capital appreciation is the primary target in momentum trading. Investors purchase securities having a high potential for growth in the future, but the prices are suppressed due to market fluctuations. Relative or absolute momentum investment strategies can be implemented.
Swing Trading
Similar to momentum trading, swing trading generates capital gains through short term investment strategies. Volatile stocks are targeted in such cases, and procured shares are sold off as soon as a massive movement in prices is witnessed.
Final Thoughts
Intraday trading can be a profitable venture for experienced traders who understand market dynamics and have the time and emotional discipline to monitor positions throughout the trading day. However, it requires extensive knowledge, careful stock selection, and risk management. When it comes to booking profits in intraday trading, you must conduct an extensive study. Certain signs must be followed for the same aim. Intraday advice is frequently thought to be the Holy Grail; however, this is not totally correct. Intraday Trading Indicators can be useful when combined with a thorough plan to maximise returns. For novice investors, alternative trading methods like standard trading, momentum trading, or swing trading may be more suitable. Always remember to invest only what you can afford to lose and continuously evaluate your performance to improve your trading strategies.