Introduction – What is Intraday Trading
Stock market participants carry out trading and investing and hold their positions for different time durations, varying from a few seconds to a few years. Some even hold their positions for decades. Of these different trading durations, we will be discussing intraday trades and learn what are the intraday trading strategies.
Intraday trading refers to taking a position and squaring it off or exiting it in the same trading session. These trades are considered short-term trades and the strategies and factors taken into consideration are vastly different as compared to long-term trades. Intraday trading can be carried out in stocks, commodities, currencies, as well as derivatives segments.
There are certain rules applicable to intraday trading which one must remember before entering a trade. When placing an intraday trade, you must ensure that you have selected the correct option and are not accidentally taking a delivery trade. Most brokers have intraday trade set as a default. The option of “margin” trade might appear instead of “intraday” in some broking terminals or apps.
Trade timing is one of the intraday trading rules you must keep in mind. For intraday trading, you must square off or close (or exit) your position 15 minutes before the end of the trading session. If it is not squared off, the broker will square off your position at whatever is the market price available at that moment. In case you wish to hold your position till 3:30 or for the next day or longer, you must convert your position to delivery. This can be done easily from your trading terminal or app itself. In this scenario, the brokerage applicable to delivery trades will be applied to your intraday trade.
You can manually square off your trade or set a stop loss or target order. It is advisable to set these orders right after taking the trade so that your capital is protected from a spike in the opposite side of your view.
Intraday Trading for Beginners
Here, we will list some of the popular intraday trading strategies used by traders to make profits. The basic rules of the strategy will also be mentioned. While these strategies are successful most of the time, we cannot guarantee that they will always work. To ensure that you make a decent profit, it is advisable to carry out back-testing of these strategies on the stocks you will be choosing for your intraday trades. You should set a favourable risk to reward ratio of at least 1:2 or more to ensure profitability.
When taking intraday trades, it is preferred to set your candlestick charts to 5 minutes or 15 minutes.
This strategy uses two Exponential Moving Averages (EMA) of different durations. When the shorter duration EMA crosses the longer duration EMA from below to go upwards, it is considered as a signal to take a long position (buy) in the stock. When the reverse happens, i.e. the shorter EMA crosses longer EMA from above to go below it, it is a signal to take a short position (sell) in the stock. You can book profit when you have achieved your target or the EMA gives a reverse crossover from where you took a position.
Traders generally use 9 and 21-period EMA for intraday trading, but you can try different combinations to see what works best for you.
SuperTrend is an indicator which can be interpreted very simply. When the SuperTrend line turns green, it is a buy signal and when the line turns red, it indicates a sell signal. You can exit your trade when the line changes to the other colour.
The default settings for SuperTrend show Length as 10 and Factor as 3. There is no need to change these settings but you are free to try other combinations to find out which is suitable for your needs.
Relative Strength Index is another easy to use an indicator that can be applied for intraday trading. It consists of three horizontal lines: centre line, a horizontal line at 70 marking the area above it as an overbought zone, and horizontal line at 30 marking the area below it as an oversold zone. When the signal line crosses from the oversold zone to above it, it is a signal to enter a buy trade and crossing into overbought zone is a signal to exit your buy trade or to trail your stop loss. However, when the line crosses from overbought zone to below it, it is a signal to take a sell trade. You can exit the trade once the signal line crosses into the oversold zone or you can trail your stop loss.
Default settings have RSI length set at 14, oversold zone is below 30 and overbought zone is above 70. You can change these settings. Some traders prefer a combination of 40-60 or 20-80 for the oversold and overbought zones.
Moving Average Convergence Divergence can also be used for intraday trading when applied on 5 minutes or 15 minutes candlestick charts. When the MACD line crosses the MACD Signal line from below to go above, it is an indication to take a buy trade. When the MACD line crosses the MACD Signal line from above to go below, it is an indication to take a sell trade. You can exit your trade when the crossover is reversed. Default settings are preferred but they can be altered to suit your trading style better.
Other Important Factors for Intraday Trading
Liquidity: When selecting stocks for intraday trading, we must pick ones which have sufficient liquidity to ensure that when you square off the trade there is another market player on the other side whose trade matches yours to make sure your order is executed. If you pick a low liquidity stock or derivative or other asset, then there are chances that your square-off order may not be executed and you would either have to exit at the market price or you could even be forced to convert your trade to a delivery trade, thus increasing your risk.
Volatility: Another important factor is volatility. For intraday trading, you require a stock which shows ample of movement throughout the day, giving you an opportunity to enter and exit trades with good amount of profit. The volatility of the stock or asset can be gauged by its beta value.
Beta value helps us measure the expected movement in a stock relative to the movements in the overall market. A beta value greater than 1 indicates that the stock or asset is more volatile than the overall market, whereas, a beta value of less than 1 indicates that the stock is less volatile and moves slower than the rest of the market. For intraday trading, it is advisable to pick stocks with high beta value as they are more likely to give sufficient price movement to make profits.
SGX Nifty Futures: For traders who wish to gauge how the market will open, they can refer to SGX Nifty Futures. SGX Nifty Futures is the Nifty Future that trades on the Singapore Stock Exchange and can give you a good hint on what to expect for Nifty’s opening. This is especially useful for traders who take positions in futures and options of Nifty.
Advantages of Intraday Trading
- Capital required for intraday trading is less as you can participate in margin trading
- You can make big profits when there is high volatility
- You can immediately withdraw your money after exiting the trade as there is no settlement time as is the case in delivery trading
- As your capital is freed up immediately, you can take trades more frequently
- You can take advantage of leverage trading, depending on the margin provided by your broker
Disadvantages of Intraday Trading
- When you are taking more frequent trades, you are more likely to be rash and may make errors
- When you make money faster, you also run the risk of losing it faster, making this a risky endeavour if you do not stick to your trading plan
- There will be good days and bad days, depending on the market
- Loss in trading can have a negative effect on your psychology and may take a toll on your health
We hope this blog has clarified the concept of intraday trading and the factors one must remember before engaging in it. Please reach out to us in case you have any more queries.
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