If you’re a trader who wants to try intraday trading, here’s a comprehensive overview of some of the benefits you get to enjoy with this strategy.
1. Elimination of overnight risk
This is among the most important intraday benefits that you get to experience. Also known as gap risk, the overnight risk is the risk of a trade or a position significantly moving in an unfavourable direction overnight, i.e., during the period between the close of a trading session and the opening of a new session.
Market-moving events, such as corporate earnings, economic developments or announcements, geopolitical events, and other news published during this period can influence investor sentiment. This can cause the price of the security to move significantly in either direction when it opens up for trade on the next day.
Overnight risk comes into play when you hold a position or a trade for more than a day. Intraday trading eliminates this risk since you close out all opening positions by the end of the day. This means that your trade won’t be affected by any significant developments that might occur during the after-market hours.
2. Use of leverage
With the rise of new-age stockbrokers offering many innovative benefits, leverage is one of the many new intraday trading benefits you can tap into. It allows you to enter into large positions by simply depositing a small amount with your broker as a margin. Here’s a simple example to help you understand how this works.
Let’s say that your stockbroker offers 5X leverage. And say you wish to make an intraday trade in a particular stock. The current market price of this stock is Rs. 150, and you decide to purchase 1,000 shares. Now, in a normal trade, you will have to pay Rs. 1,50,000 (Rs. 150 x 1,000 shares) to complete the transaction.
However, since your stockbroker offers 5X leverage on intraday trades, you will only have to pay Rs. 30,000 (Rs. 1,50,000 ÷ 5) to purchase 1,000 shares.
In this manner, leverage enables you to take on much larger positions and enhances the profits you make per trade. That said, it is important to recognise that leverage can also be a double-edged sword that could enhance your losses if the market moves against you.
3. Potential for higher returns
The potential for higher returns is another one of the primary advantages of intraday trading. Although the profit potential may be lower per trade when compared to other trading strategies or techniques, day trading compensates for it by providing multiple trading opportunities.
Many experienced traders make hundreds of trades within a single day. The profits from these trades, despite being small individually, can all add up to become quite significant. When intraday trading is done consistently and successfully throughout the year, your total returns could match or even beat the returns you could make with other short-term or medium-term trading techniques.
4. Potential for short selling
The option to short sell an asset is also among the many benefits of intraday trading. Short-selling or shorting is a technique where you sell an asset first at a higher price (often without owning it) and buy it back at a lower price. The difference between the selling price and the buying price is your profit. Intraday traders often use short-sell securities during a bearish market or when the market is experiencing a brief downward trend.
Since the Indian stock market operates on the T+1 settlement cycle, you cannot sell a security one day and buy it back on another day. However, with intraday trading, short selling is permitted since there isn’t any kind of settlement involved.
Disadvantages of intraday trading
While intraday trading offers the potential for significant profits, it comes with a host of risks and challenges:
- High volatility: The fast-paced nature of intraday trading exposes traders to high levels of market volatility. Sudden price swings can lead to substantial losses if not managed carefully.
- Time-consuming: Intraday trading demands constant monitoring of the market. Traders need to stay glued to their screens to identify opportunities and react swiftly to price movements. This high level of time commitment can be mentally and physically draining.
- Emotional rollercoaster: The volatile nature of the market can trigger intense emotions like fear, greed, and anxiety. These emotions can cloud judgment and lead to impulsive decisions, which can be detrimental to trading success.
- Technical complexity: Successful intraday trading requires a deep understanding of technical analysis tools and indicators. Misinterpreting these tools or relying on them too heavily can lead to poor trading decisions.
- Transaction costs: Frequent trading can result in significant transaction costs, including brokerage fees and slippage. These costs can erode profits, especially for smaller trades.
- Risk of loss: Despite the potential for high returns, intraday trading carries a high risk of loss. A single wrong trade can wipe out multiple profitable trades.
Conclusion
This sums up the various advantages of intraday trading. Although day trading can produce greater returns, it can also be risky, especially if the markets are volatile. So, while the advantages are many, it’s also important to consider the risks involved with this trading technique before you dedicate your time and effort to making intraday trades.
If you don’t have a proper risk management plan in place, your intraday position could lead to significant losses. So, using appropriate stop-loss limits and trailing stop-loss orders is essential to reduce the downside and protect your gains. You can also limit your position size based on the risk-reward ratio of the trade. All in all, with a comprehensive risk management plan, you can not only protect your gains but also increase the chances of making more successful intraday trades.
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