The Meaning of Intraday Trading"What does intraday trading mean?" is the question asked by every trader who enters the stock market arena for the first time. The meaning of intraday trading is very simple - A Transaction initiated to either buy or sell, just for the day and reversed during the course of the day, so that there is no outstanding or delivery position of any kind pending at the end of the day for the next day. In simple terms, intraday trading is a form a trading where the trader takes no overnight or carry forward risk on his positions.
Why do people indulge in intraday trading viz. a viz. positional trading?Intraday trading is usually considered a lesser risky strategy compared to positional trading since the trader is immune to events that occur after the close of market which can result in gap up or gap down movements for the following days. Imagine, a leading blue chip company declaring bankruptcy post market closing and the stock opens gap down the following day, investors and traders holding the stock at the end of the day would have no opportunity to exit overnight and would have to take a hit on their portfolio. In case of an intraday trader, information released during the day can be processed during the day and be reacted upon with a chance to deal with the information impact in real time. So to a large extent, an intraday trader saves himself from the feeling of helplessness of gap up or gap down movements.
Intraday Trading TechniquesThere are essentially two ways to approach intraday trading;
- To follow momentum- go with the flow which is popularly known as &
- To place contra bets on the principles of mean reversion.
Intraday Strategies to profitably trade the above two techniques:
- For capturing momentum on any particular stock or index, the best way to play them is through Breakouts. Breakouts after first hour of trade are generally very reliable and safe to trade. Stop loss can be conveniently placed at the low of the day for long positions when an hourly breakout is noticed.
- In order to place contra bets one must look out for divergences in the price viz. a viz. velocity indicators for e.g. during up moves, when the overbought indicator shows fatigue or does not conform with the price action, it is a sign of loss of momentum and the stock or security can be sold short keeping day’s high as the stop loss, vice versa for long trades.
Importance of volume:
- High liquidity is essential for technical analysis for intraday trading otherwise emergence of false signals will result into many whipsaw losses.
- Volume is a very powerful indicator to suggest strength of momentum or loss of momentum which is an essential confirmation for intraday trading.
Risk management for Intraday Trading:
- Keeping a stop loss is the most essential rule for intraday trading.
- Trading with a minimum risk to reward ratio of 1:2 or above is the second most important rule.
- Risking not more than 1% of the trading capital and further dividing the same to generate multiple intraday trades will ensure sustainability of profits and will keep the necessary emotional calm to identify the opportunities as and when they come.