Intraday means ‘within the day’. Intraday trading refers to buying and selling shares within the same day. In intraday trading, traders close their position before the end of market hours. The aim of intraday trading is to achieve quick short term profits.
A type of online trading, Intraday trading is also known as day trading. It is a short term investment approach that requires traders to constantly monitor the share prices. Intraday traders use technical analysis to select entry and exit points. Intraday trading is suitable for high risk traders.
Example of Intraday Trading
Let us understand how intraday trading works with this simple example:
ABC Ltd was trading at Rs 500/share at 9:15 am. By noon the stock price had risen to Rs 550/share.
Mr Ram, an intraday trader bought 1,000 shares of ABC Ltd. for Rs 500 in the morning. He sold his shares at Rs 550 in the afternoon. By doing this, he made a profit of Rs 50 per share i.e. Rs. 50,000 profit within a few hours.
This is how intraday trading works.
What happens if you do not close your position in intraday trading?
If you fail to close your position at the end of the trading day, then your broker may square off the position or convert it to delivery trade.
What is the difference between Intraday trading & regular trading?
Difference between intraday trading and regular trading is ‘Delivery’. In intraday trading, delivery of shares is not received i.e shares are not credited to your Demat account.
In regular trading, shares are debited (subtracted) or credited (added) from your Demat account in T+2 days.
Who should do intraday trading?
Intraday trading is risky and suitable for aggressive investors. If you have a full time day job and cannot track the markets regularly, then you should avoid intraday trading.
Traders who have the time, resources and expertise to closely track the market trends and indicators should do intraday trading.
What are the Advantages of Intraday Trading
After covering the basics of intraday trading, let us understand the advantages of Intraday trading.
1. Eliminates overnight risk:
One of the major advantages of day trading is that it does not carry overnight risk. Since the position is closed on the same day, any negative news after market closure does not affect an intraday trader.
2. No Capital Blocking:
Since trades are settled at the end of every day, the investment capital remains unblocked. Profits or losses are adjusted as per market closing.
3. High Leverage:
Leverage is the ability to control big positions with small capital. Brokers generally provide very high leverages for intraday trading. Since intraday traders rely on smallest price movements, high leverage helps them increase their profits.
4. Benefit of both Bullish & Bearish Markets:
Intraday traders can take advantage of both bullish (rising) or bearish (falling) markets. In a bullish market, intraday traders can buy stocks and make profits. Whereas in a bearish market, intraday traders can short sell and make profits.
5. Higher returns:
Day traders, using correct strategy can generate higher short term profits compared to long term investors.
What are the Disadvantages of intraday trading?
The biggest disadvantage of day trading is that it’s time consuming. Day traders have to constantly track the markets, and even a split second delay can result in huge losses.
Another disadvantage of day trading is the high brokerage cost. Since day traders constantly buy and sell shares, they incur huge brokerage charges. But this can be avoided by opening a trading account with a discount broker like Samco. With Samco, intraday traders will never pay more than Rs 20 per trade.
10 Important Points to Consider Before Starting Intraday Trading
Intraday traders need to be quick decision makers. Since the position is closed on the same day, you need to act fast to be on top of the game. Here are 10 important points to consider before starting intraday trading.
1. Pick stocks that can be sold easily: This basic intraday stock selection tip can save you from massive losses. Traders should pick stocks with high liquidity so that they can easily sell at any point during the day. Learn how to use liquidity and volatility in trading.
2. Stay away from Penny Stocks: Stocks which trade at very low prices are known as Penny stocks. These stocks are highly illiquid i.e. difficult to sell and have high fluctuations. Intraday trading in penny stocks is similar to swimming with sharks!
3. Select stocks with high market correlation: In intraday trading, following market trends and indicators can help you make profits. Follow the general market flow and invest in stocks which move in the same direction as the market. So, if the sentiment is positive, look for stocks that will rise. If the market sentiment is negative, look for stocks which may fall.
4. Luck is a byproduct of Research: When selecting stocks for intraday trading, it is important to do in-depth market research. If you do not have expertise in intraday trading, then you should consult a broker who can guide you in the start.
5. Trade in Geopolitically charged stocks: Certain stocks are more volatile during geopolitical events such as election, release of GDP, unemployment data etc. Even geopolitical tensions between countries can provide profit opportunities for intraday traders. For example, the recent trade war between USA & China, could prove to be profitable for India as manufacturing might shift from China to India. In such situations, manufacturing and export stocks may rally.
6. Select stocks which are sensitive to market news: Another method of selecting stocks for intraday trading is to study their quarterly earnings.
For example: The shares of ABC Ltd are trading at Rs 200/share. The company is set to declare its quarter 2 earnings at 11 am. Mr Ram expects that the earnings will match market expectations and the stock price will go up. Luckily, the price does rise to Rs 250 per share.
Now, to make intraday profit, Mr Ram can sell the share at Rs 250, and book a profit of Rs 50 per share!
In case you feel that the stock will fall, you can also do intraday short selling.
7. Strictly use a stop-loss: A stop-loss is an important risk management tool which should be followed by all traders, including intraday traders. As the name suggests, a stop-loss helps you ‘stop’ your ‘losses’.
Let’s understand how a stop-loss works with the example of Mr Ram. Imagine if the company reports a loss and the share price falls to Rs 190. To stop his losses, Mr Ram can place a stop-loss at Rs 190.
As soon as the stock price hits Rs 190, his position would be closed. So, even if the stock closes at Rs 150, Mr Ram’s loss will be Rs 10 only (Rs 200-Rs 190), not Rs 50.
8. Don’t Be Greedy: Greed is every trader’s enemy, especially in intraday trading. Day traders often don’t close their position even if the target price is reached due to greed. They wait for the stock price to increase further. This strategy fails in most cases and traders end up booking loss. Hence intraday traders should set a fixed target price before taking positions.
9. Plan your Exit: From Aeroplanes to the stock markets, an exit plan is very important. Often, beginner intraday traders prematurely sell their stock, when they see a nominal price rise without fulfilling the full potential of the stock. Hence, day traders must plan their exit levels even before they enter the trade.
10. Do not risk your entire capital: The Intraday trading world is thrilling. But new investors often end up losing their entire capital at one go. Hence it is important to risk only a portion of your total capital in each trade.
How to Start Intraday trading?
Step 1: Open a trading account with a discount broker like Samco.
Step 2: Fund your trading account and set up daily charts, moving averages etc to identify market trends.
Step 3: Select stocks for intraday trading. For beginners, here’s the list of best stocks for intraday trading in India.
Step 4: place your order and maintain a strict stop-loss.
Step 5: Track the markets and book your profits or losses as per your trading strategy. Do not let fear or greed dominate your trade.
Conclusion
Intraday or day trading is an art. It needs years of practice to perfect. While it helps in generating high returns, at times, it also leads to high losses. Hence day traders should maintain strict stop-loss while trading.
Fear and Greed run very high in day trading. To become a successful day trader, you must overcome both these emotions. Since day trading demands quick decision making skills, you should avoid making emotional decisions.
We hope the above information has helped you understand day trading. To start intraday trading, open a Demat account with Samco, and get 100% brokerage cashback on all trades placed from the StockNote app for the first month!
[Suggested Reading: Best Stocks for Intraday Trading in 2020 in India]
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