Must Knows

Intraday trading: Meaning, strategies, indicators, benefits and limitations

[] Intraday trading refers to buying and selling stocks on the same trading day. Here’s a complete guide for stock market investors. 

Buying and selling stocks or shares on the same trading day is called intraday trading. It is also called day trading. Stock prices fluctuate throughout the day, and intraday traders buy and sell shares on the same trading day to profit from these fluctuations.

You are reading: Intraday trading: Meaning, strategies, indicators, benefits and limitations

What is intraday trading?

It is a shorthand term used in the financial world to describe securities that are traded during regular business hours. ETFs and stocks are among these securities. Also referred to as intraday, intraday refers to the asset’s daily highs and lows. Short-term or day traders who want to make multiple trades within a single trading session are particularly affected by intraday price movements. By the time the market closes, all these traders will have settled their positions.

Basis of intraday trading

A trader buying and selling stocks on the same day, also known as intraday trading, is referred to as a day trader. To avoid losses, traders, especially beginners, must understand the nitty-gritty of such trading techniques, despite how easy it sounds.

What is the process of intraday trading? Suppose someone wants to buy certain stocks of a company, then they must specify ‘intraday’ on whatever platform they use for investing. The broker will be notified that the user intends to trade the same company’s stocks the same day before the market closes.

For example:- The price of a particular stock opens at Rs 600 but jumps to Rs 660 within a couple of hours. One would make 60,000 rupees in just a few hours by buying 1,000 stocks in the morning and selling them at 660 rupees.

Intraday trading strategies

Traders use a variety of intraday strategies. Some of the strategies are mentioned below:

  • The method of making many small profits on small price changes throughout the day is called scalping.
  • Buy and sell decisions are primarily based on support and resistance levels in range trading.
  • Trading opportunities arising from news events are typically seized through news-based trading.
  • Inefficiencies in the market can be exploited by high-frequency trading strategies that use sophisticated algorithms.

Intraday trading indicators

Whether a person is an experienced investor or a new one, they may struggle to handle multiple events occurring simultaneously in intraday trading. Keeping an eye on the trends and indicators can be quite beneficial when doing intraday trading in India. Here are some indicators to consider:

Moving average

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The term average is taught in school, and we all know what it means. Moving averages are just an extension of that. Moving averages are trend indicators that show the behaviour of a stock over a specific period of time as a line on the charts. They show the opening and closing rates of a particular stock. On the chart, the minimum average line shows the average closing rates of the stock in that interval. By doing so, one can determine the flow of the stock and understand the fluctuations in the price.

Bollinger bands

The standard deviation of the stock is also one of the most popular technical tools. This chart has three lines: the moving average, the upper limit, and the lower limit. A band or volatility range represents the range in which a particular stock price moves up or down. By observing the variations in the stock price over a particular period, one can locate price variations and invest accordingly.

Momentum oscillators

Stock prices are highly volatile and are largely determined by market conditions. A momentum oscillator tells a trader whether a stock will rise or fall over a given period of time. The scale ranges from 1 to 100, which indicate whether a stock will rise or fall further. A trader can then determine the right time to buy a particular stock based on this information.

Relative strength index

Technical indicators are used in the analysis of financial markets, such as the relative strength index. The chart shows the current and historical strength or weakness of a stock or market based on the closing prices of recent trading periods. This is not the same as relative strength. The relative Strength Index (RSI) is a measure of price momentum used by traders to gauge a stock’s performance. RSI measures the rate at which a security’s price rises or falls in response to market activity. On a scale from 0 to 100, the RSI plots this result.

Benefits of intraday trading

No need to take overnight positions

Holding shares overnight in the stock market carries a tangible risk.  When it comes to intraday trading, this risk is eliminated. Intraday trading has the primary advantage that all positions are squared off on the same day. Since there is no ownership after the close of the session, there is no risk of your capital getting “stuck.”

Gain when the markets are falling

Additionally, intraday trading has the benefit of allowing you to profit from falling markets as well. In order to do this, a technique known as “short selling” is used. Stock shorting is the act of selling a stock at a higher price and buying it at a lower price later. When the stock price declines, you can buy first and sell later, unlike in the cash segment.

Use of margins

Day traders in India can make even more money by intraday trading due to the margins offered by brokers. When you day trade, you will only pay a small percentage of your total order value. Leverage is used to protect against losses. Because they generate high brokerage, it may be as much as 10-15 times for seasoned players. The fixed margins that stockbrokers provide to all-day traders can enable you to place larger bets even as a beginner. Day traders can benefit from margins when they are used prudently.

Ace it with technical analysis

Fundamental analysis of a company is essential for serious investors in the cash segment of the stock market. An analysis of a company’s finances, its place in its industry and its economy is called a financial analysis. You may have to spend a lot of time and effort on this. You do not need to spend much time on fundamental analysis when you trade intraday in India. Technical analysis can be relied upon instead. The study of technical analysis involves analysing charts for patterns and predicting stock movements. With time and patience, you can decipher the patterns that will make developing intraday trading strategies easier.

Reading the pulse of the market

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Additionally, intraday traders receive first-hand information about any changes in sentiment. Day traders are often the first to feel the impact of an economic or social occurrence. You will profit if you can identify the signals of such events promptly.

Opportunity to earn a regular income

Even though intraday trading is risky, it is steadily gaining popularity because it provides substantial returns. Investing a few hours a day in trading can provide you with an alternative source of income. Trading can be conducted at home or at the office. Investing in carefully-structured strategies over time could become your main source of income. 

Limitations of intraday trading

One cannot earn handsomely every single day

There are days when you will not make double-digit profits from intraday trading. Occasionally, the markets will not move in your favour, causing you to lose your investment capital. It is because of this that people fear intraday trading and call it risky. If you decide to trade intraday, you should fully understand the risks involved.

High discipline and personal control

If you are someone who becomes overwhelmed by intraday trading situations, this field isn’t for you. If you find that looking at your capital being washed away makes you impractical, then you should not engage in intraday trading. If the situation turns bad, you must remain calm and make well-reasoned, practical decisions without losing your composure. In the face of losses, many people make rash decisions which further worsen the situation.

High risk

In the stock market, every intraday trader has suffered losses. As stock markets are unpredictable, it is possible to lose out every day. It does not make sense for a person who cannot risk their money to invest it in intraday trading. When trading in the markets, you always run the risk of losing money. Do not invest money you cannot afford to lose.

Overnight gap ups and downs

A new day is a fresh start for intraday traders. So, if there were major news events overnight and orders were placed to buy or sell, then the stock price opens at a different level than what it closed at previously. There are no gap ups or gap downs on the stock market that occur overnight, so you cannot use them. During the trading day, gaps in the market can be used by you to earn profit.

Intraday trading versus day trading: What’s the difference?

Intraday trading differs from day trading, but their meaning is the same. In intraday trading, shares are bought and sold on the stock exchange on the same day. It is also referred to as day trading since buying and selling are done on the same day.

What are the best stocks to trade intraday?

Selecting the right stocks is crucial to intraday trading success. The following criteria should be considered when choosing equities for intraday trading.

  • Stocks with high liquidity are picked by intraday traders.
  • Stocks with moderate volatility are ideal for day trading because they fluctuate heavily during the day.
  • Traders pick trending stocks based on their recent news.
  • Stocks with high volumes are suitable for day trading since their demand is high.
  • Traders closely follow the performance of the highest gainer and lowest loser of the day as a potential profit opportunity.

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Category: Must Knows

Debora Berti

Università degli Studi di Firenze, IT

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