The dominant narrative about stock markets propagates investing for the long term to generate profit. A number of world-famous investors are quoted about holding stocks for several years. But long-term investing is not the only way to earn through the stock markets, intraday trading can also deliver handsome profits if done correctly.
What is intraday trading?
As the name suggests, intraday trading or day trading is buying and then selling the shares on the same day before the market closes. Essentially, you square off all the open positions during the market hours in intraday trading. The defining feature of an intraday trade is that the trader doesn’t take delivery of shares. Regular order is settled in T+2 days in India, while in an intraday trade the positions are closed on the same day. The ownership of shares doesn’t change during intraday trades.
Basics for intraday trading
The basic requirements for intraday trading and long-term investing are the same—a trading and a demat account. Beyond having a trading account, you should ensure that your broker supports speedy executions as even seconds can make a significant difference in intraday trades. Another factor to consider while choosing the brokerage is the level of technical support they provide as intraday trading requires constant monitoring and thorough research. One of the biggest factors to take into account before starting is the fees charged by the brokerage. Since multiple trades will take place in a day, high transaction fees could have an adverse impact on the overall returns. 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.
Successful day trading is a matter of discipline and consistency. If you frame a set of rules and stick to it, you may be able to generate profits from intraday trades. While day trading, people often get carried away and end up losing a lot of money.