What is Intraday Trading?

Intraday trading, also known as day trading, means buying and selling stocks on the same day to profit from price changes. Traders need to close their trades before the market closes. If not, the broker might automatically close them or turn them into regular trades. Intraday trading helps reduce risks by avoiding long-term investments. Keep reading to learn how it works and how you can get started!

How to do intraday trading?

1. Choose highly liquid stocks:
   Liquidity is crucial for intraday trading, ensuring easy buying and selling of stocks. Small and mid-cap stocks often offer high liquidity and volatility, making them ideal for intraday trades.
2. Volatility considerations:
   Selecting stocks with moderate volatility is advisable. Extreme price fluctuations exceeding 3% can increase the risk of losses in case of sudden market downturns.
3. Strong correlation:
   Investing in stocks that closely follow the movement of benchmark indices helps in anticipating price trends and aligning trades accordingly.
4. Higher trade volume:
   Tracking the trade volume index of securities helps identify demand and supply trends, providing insights into potential price movements and trading opportunities.

How intraday trading works?

Intraday trading involves capitalising on short-term price fluctuations within the same trading day to generate profits. Traders closely monitor stock price movements and utilise technical analysis tools to identify trading opportunities. Strategies such as scalping, which focuses on small frequent gains, and momentum trading, which capitalises on price trends, are commonly employed. Intraday trading requires thorough market knowledge, effective risk management, and the ability to make quick decisions in a rapidly changing environment.

Features of intraday trading

1. Ownership of stocks:

In intraday trading, traders must open and close their stock positions within the same trading day. If the position is not closed, it is automatically squared off at the prevailing market price. Since trades are settled within the day, ownership of the stock is not transferred to the trader.

2. Same day trading:

The objective of intraday trading is to capitalise on price fluctuations rather than to own stocks. All transactions must be completed within market hours to take advantage of daily price movements.

3. Leveraging:

Intraday traders can leverage their positions by borrowing funds from brokers to enhance their buying power. While leverage can amplify potential returns, it comes with associated risks and conditions that traders should thoroughly understand before utilising it.

4. Research:

Successful intraday trading requires extensive research on target stocks, analysis of market charts using indicators, and the development of personalised strategies. Implementing a stop-loss is crucial to mitigate the risk of substantial losses.

Benefits of intraday trading

1. Lower risk:

Since stocks are bought and sold within the same day, exposure to long-term market risks is minimised. Unlike standard trading, where price fluctuations over an extended period can result in significant losses, intraday trading reduces this risk.

2. Lower commission charges:

Intraday trading typically incurs lower brokerage fees compared to standard trading, as there are no delivery charges involved. The costs related to securities transfer, such as transaction tax and service charges, are included in the brokerage fees, making it a cost-effective option.

3. Higher profits:

If executed with the right strategies, intraday trading can lead to substantial profits. In a rising market, capital appreciation can be achieved, and during downturns, traders can employ short-selling strategies to generate profits.

4. Liquidity:

Intraday trading offers high liquidity, allowing traders to recover their invested funds quickly without the need to hold assets for an extended period. This feature ensures financial flexibility to meet other personal or investment needs.

5. Capital gains through market fluctuations:

Traders can profit from both rising and falling markets by adopting appropriate strategies. In bullish markets, purchasing and selling stocks can lead to gains, while in bearish conditions, short-selling can provide profit opportunities.

Intraday trading indicators

Let us discover the different types of intraday trading indicators:

1. Moving average

Moving averages are the most common and widely used indicator. It is the line on the stock chart which connects the average closing rates over a given period. If you are considering a more extended period, the moving average will be more well-grounded. Moving averages let you comprehend the underlying movement of price as most of the time price of a stock doesn’t move only in one direction

2. Bollinger bands

Bollinger bands are a bit more advanced than moving averages. It comprises three lines - the moving average, an upper limit, and a lower limit. With all these, you can comprehend the underlying movement of the stocks better than just by moving averages

3. Momentum oscillators

Sometimes stock prices move unrelated to the bullish or bearish market trends

4. Relative strength index (RSI)

This gets calculated in the index form, narrowing the RSI score ranging between 0 to 100. The index increases when the price of the stock rises and vice versa.

How is intraday trading different from regular trading?

Let us explore how an intraday trading is different from a regular trading: