Intraday Trading: A Look at The Essentials

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Intraday Trading Strategies - The concept of intraday trading comprises capital gains and losses. Capital gain is the profit made when a trader buys low and sells high. Here are some tips or strategies that minimize the capital losses.

Intraday trading involves the speedy execution of trades during the course of the day on the basis of minor changes lasting for a short period of time in the price of the company’s share. In other words, it involves the study of movement in the company’s share price over a period of minutes or hours to generate profit.

The concept of intraday trading comprises capital gains and losses. Capital gain is the profit made when a trader buys low and sells high. The opposite is termed as capital loss, that is, selling an asset for a price lower than that paid while buying it. A careful study of market movement helps minimise capital losses. Some of these are:

  • Investing only the amount that you can afford to lose
  • To stop trading if you believe that you have made enough profit or borne losses beyond a predefined limit
  • Making trading decisions in the direction of the general market sentiment

Intraday Trading Strategies

Intraday Trading Strategies

Intraday Trading Strategies

Leveraging Volatility

In news-based volatility trading, traders monitor important news updates during the course of a trading session. For example, if they are trading an individual stock, its share price could be affected by the announcement of the company’s annual or quarterly financial results, news related to bonuses, mergers and the company’s promoters, amongst others. Then there are news-based macroeconomic triggers, such as data regarding the country’s GDP, fiscal deficit, policy decisions and movement in the forex market, particularly that of the INR and US Dollar.

Another way volatility is used in intraday trading is with the volatility breakout system. Here, the trader first measures the range of the previous day’s trading, or the difference between the highest and lowest price of the stock being analysed. After this, they decide on a percentage of this range at which they will enter. Here, a higher percentage is a more reliable entry point. Next, the levels at which the stock will be bought if it rises or sold if it falls are decided upon. Once the price breaks through one of these levels, traders enter in the direction of the price movement.

Minimising Risk

Though volatility can play the role of a friend and enable traders to generate profit with intraday trading, it can also be the foe that causes substantial losses. Intraday trading brings with it significant risks. This calls for an in-depth understanding of the markets and the use of certain strategies or risk-management principles to ensure that traders minimise their investment risk and maximise profits in the short term.

The most important of these is the stop loss, a strategy by which a trader places an order with a brokerage to buy or sell at or better than a certain predetermined level if the share price crosses it.

Another important money-management rule used by traders to reduce the element of risk is that of position sizing. This refers to the number of units of a particular security invested in by the trader. This strategy calls for any trader risking only a certain percentage of trading capital on a single trade. Key factors affecting this decision are the account size and risk tolerance levels.

Support Mechanism

Aside from these risk-management strategies, there are other tools that provide support to the intraday trader. One of these are graphs, which are used extensively for intraday technical analysis by using historical share price data, and others are candlesticks, volume and tick charts etc. They are very popular, and used by most intraday traders to understand market movements and sentiments, and then trade accordingly.

The volatility in the current market scenario could be advantageous for intraday trading if used effectively.