Different financial avenues have opened up for the common man. What was once considered to be the forte of only professional traders and financial firms is now accessible to everyone. We are, of course, referring to day trading also known as intraday trading.
Intraday trading refers to the buying and selling of securities within the same trading day. The objective is simple- to buy securities at a lesser price and sell them when the price is higher on the same day.
You do not have to be a financial expert to know how to do intraday trading. However, you do need to be someone who has the time to monitor the rise and fall of your chosen securities so that you can act as soon as needed.
What are the benefits of intraday trading?
There are two key benefits of intraday trading for the smart and discerning trader. These include:
– No overnight risks
When you make an intraday trading transaction, the transaction is closed within the same trading day. What you sell or buy depends on the status of the market at that time only. You do not have to worry about overnight risks such as market crashes in another hemisphere. They will not affect your profitability as your trades are made when the market you are trading in is open.
– Potential for high returns
In the short span of one trading day, you can amass great profits. However, one crucial factor here is that you need to have a smart strategy and adequate knowledge of securities and trends to make the right trade.
Before you begin intraday trading, you should acknowledge the risks associated with intraday trading, and have a plan of action ready in case you wish to stop or exit the market at any point. While there are promising returns, there are also significant risks and factors beyond your control that can lead to unfavourable outcomes.
What are the prerequisites before starting intraday trading?
In order to place orders to buy or sell, as well as hold your securities, you need to have an active demat and trading account. A demat account will hold your different securities while the trading account will allow you to place orders.
Several tools that can help you analyse market trends, but they are not mandatory. You can rely on your own analysis of market trends to make your transactions.
If you are looking to do intraday trading, there are a few tips to help trade successfully.
Conduct due diligence
There could be companies or brands that you personally like or companies that everyone in your social circle always trades in. However, it is vital that you do not get carried away with sentiment and buy or sell a particular stock. Do your homework and trade stocks that align with your own interests. For example, if you work in the automobile industry, you may understand the stocks of an automobile company better. You can buy a few shares of that company and notice its status over a few days. Check to see if its stock prices are stable or constantly fluctuate. Also, check to see if the volume changes significantly. You will have certain questions and you need to understand the answers to them before fully getting into intraday trading.
Identify stocks that move with the market
There are certain stocks that move in the same direction as the indices. For instance, if the Sensex is gaining points, then these stocks also gain. If the Sensex loses points, so do these stocks. Identify the correlations and trade accordingly, if you are looking for safe bets.
Apart from these ‘safe stocks’ there are ‘chaotic’ stocks that can go in either direction at a very rapid rate, making them highly unpredictable. Unless you are feeling particularly adventurous, it is advisable to not trade in such stocks.
Maintain a stop-loss
Sometimes, you may feel that the price of your stock can rise further. This may entice you to wait till the end of the day or even the next day or week till you sell off the stock. Similarly, if your stock doesn’t rise, you may want to wait till it recovers. However, this defeats the purpose of intraday trading as you are left with your stock even after the trading day over. You are unable to exit the market within the same day. You may end up with the stock for a longer period and be stuck with it. That’s why it is important to have a predetermined stop-loss strategy. In stop-loss, your stock is automatically sold off when it reaches the pre-determined rate.
Lock-in on a target price
If you had bought stock when it was at Rs.100, you may have decided to sell the stock when it hit Rs. 200. However, it is easy to change your mind once you see even a nominal increase in the stock price. In such a scenario, you may wish to sell your stock when the price reaches Rs. 125. Such situations may result in you losing the opportunity to gain higher profits. To avoid that, determine a target price when you buy your stock so that you have an aim in front of you and do not stagger.
Buy shares with high liquidity
Buy shares of 2-3 companies that have high liquidity. This ensures that there are enough buyers and sellers at any point of time during the trading day so that you are not stuck with any stock at the end of the day.
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:
- Do not trade within the first hour of the market opening. This is when the biggest players trade and the whole market can be in a flux at this time. The time between 12-1 p.m. has been noted to be the best time to mark a profit.
- 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.
As you embark on your intraday trading journey, avail Angel Broking’s various tools and services to help you with making the best stock market bets.