Intraday trading is the buying and selling of a security (stocks or other financial instruments) in one trading day. This trade can take place in any market but is done most regularly in the stock and foreign exchange markets. So, this means that in intraday trading, all the positions are settled before the closing of the market day. Because of this, the trades do not result in any change of ownership of the shares.
Day trading was viewed as the domain of highly efficient professional traders and financial firms. But, this is changing now, due to a rise in the popularity of the share market as a way to make money. If done correctly, intraday trading can be a very financially sound career option, even though you can hit a rough patch from time to time. However, intraday trading is a bit more challenging for beginners, and you need thorough research and a good strategy before you begin.
If you are wondering how to start intraday trading, let us look at the basics of this type of trade.
How to Get Started
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 takes 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 utilize 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.
But, they are at a disadvantage when compared to institutional intraday traders since their resources are limited. This leads them to taking more risks. Individual traders rely more on swing trade and technical analysis to harness small price movements in stocks that are highly liquid.
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 utilize 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 analyze data.
What Are The Traits That Make A Day Trader Successful?
Starting day trade is not a decision that should be taken lightly. While the dream of earning well by working just a few hours a day can be turned into reality, the path to it requires hard work. Intraday trade is tricky to muster, and the terrain will be rocky initially. But, these are some characteristics that successful intraday traders share.
Knowledge and experience – Professional day traders have a vast wealth of knowledge of the market-place. If you make an attempt to day trade without understanding the fundamentals first, you risk losing money. While skills of technical analysis and the ability to read charts are handy skills to have, but 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 – A sturdy strategy needs to be backed up by good discipline. Many traders lose money because they do not stick to their own criteria while choosing trades. Success in any field requires discipline. 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. This fluctuation might happen due to many reasons.
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?
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.
Things to keep in mind
Which stocks to choose – Intraday trading requires the squaring off of trade positions before the closing of the market. So, you should always make sure that the stocks you choose have enough liquidity to allow you to do this. It is for this reason that large-cap stocks are highly favoured. This also reduces the likelihood of your trade affecting the share price of the stock you selected.
Timing – As an intraday trader, timing is the most crucial factor. If you do not manage to take up a position at the right time, sometimes that is all that it takes to turn a profit into a loss.
According to experts, you should refrain from taking a position right at the beginning of trading. The market during the first hour is especially volatile, and it is best to wait it out.
Choosing a broker – You should choose a broker who offers you support with both research and technical analysis. Access to the right tools is necessary to maximize on your intraday benefits. Since intraday trading involves a high number of transactions, you should always target brokers who charge low brokerage.
Does intraday trading suit you?
Intraday trading can prove to be extremely challenging and difficult. You need to take time and learn how the market functions. You should also clearly define the risks you are willing to take, the capital you can afford to invest and your goals. Intraday trading is suitable for you if you can take risks, and have the patience to watch the market closely. Intraday trading offers promises of high returns, and sounds attractive. But, the risks involved are also higher than delivery trading. So, if you are planning to balance day trading along with another job that requires your attention for a major part of the day, intraday trading might prove to be difficult.
To succeed as an intraday trader, you need to watch the market movements closely, and be quick to grab opportunities. You also need to invest the time to hone your skills of technical analysis to become more efficient as a day trader.
- Intraday trading requires time. You need time to practice different strategies and perfect them, since your profits depend on it. Because of its speed, there is no halfhearted effort in intraday trading. You need to be alert and vigilant always.
- After you have decided that the thrill of intraday trading excites you, you need to begin by taking small steps. Do your research, and select a few stocks which will be easy for you to monitor. Do not try to take a bite off everything you see.
- Stay calm and keep your emotions aside while making trade decisions. If you can keep a level head, you will find it easier to focus and execute your plans.
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.