Intraday trading: Frequently asked questions

All that you wanted to know about intraday trading but were hesitant to ask.

Intraday trading Frequently asked questions

We are currently living in the midst of a global pandemic that’s led to lockdowns everywhere. One of the advantages of working from home is that it’s encouraged many people to explore stock markets from the comfort of their living room. In fact, online trading has become a hugely attractive business because of the stellar returns that Indian stock markets have been able to generate in a short time. 

Many new investors and traders are very curious to learn how to make quick money. Most of them arguably turn towards day trading or intraday trading using technical analysis. However, it is estimated that more than 85% end up losing money in intraday trades. One of the main reasons for this failure is day traders’ lack of understanding of market swings and volatility.

Read on for some FAQs about about intraday trading:

1. What is intraday trading?

Intraday trading (or day trading) is merely speculative participation in shares within the same day; that is, buying and selling claims within the same trading day. The only motive for day traders is profit, so they are termed as speculators. 

2. Is day trading advisable for new investors?

A majority of day traders are young retail investors who are newbies to the capital markets. The primary reason for participating in day trading and not swing trading is the availability of resources. Intraday trading is motivated by the margin facility available to the traders. With minimal capital, traders get exposure to a considerably high position in the stock market limited to that day. Leveraging is essential in any business, but only if it is correctly and strategically done.

Related: 5 Reasons why people are shifting to stock trading amid COVID-19

3. What is the margin facility for intraday traders?

Margin is a merely an interest-free loan provided by the broker. Any additional leverage allows the trader to enter larger positions even with minimal capital. Unfortunately, this feeds the greed of the participants. Leveraging always gives a multiplier effect on profits and losses. The margin facility offered by different brokers ranges from 5 times to 20 times (that is, as much as 20x leverage) of the capital for intraday trading.

4. Are there any rules for intraday trading?

Well, there always are rules and guidance notes available for everything. The most common practice is to be devoid of emotion when you are day trading. Human intervention and emotional thinking can cause unwarranted losses and limited profits. This is of paramount importance for day trading as it is a type of speculation. Speculation cannot be backed by emotional decision-making. 

Related: Important things to know before investing in the stock market

Here are some rules to follow if you wish to make consistent profits through day trading:

  • Have a trading plan for the next day well in advance
  • Always have a stop-loss order for every trade to limit one’s losses
  • Have a set risk-reward ratio higher than 1:2 for day trading
  • Be conscious of the transaction costs
  • Avoid taking over-exposure; trade only what you can afford to lose
  • Use limit orders and not market orders 
  • Avoid past bias and historical performance for a stock. Intraday trading is all about the momentum for the day, so trade with the day’s trend only
  • Follow a limited number of strategies but employ them in a disciplined manner 
  • Make small profits but make them consistently

5. What is the best time for intraday trading?

Intraday trading is based on price actions and volume breakout. In other words, these are momentum-based trades. Indian stock markets operate from 9 am (pre-market) till 3.30 pm, followed by post-closing trading time (which is not very relevant for day traders).

Day traders can generally divide this entire trading day into three major sessions: 

  • Session 1: 9.15 am to 11 am
  • Session II: 11 am to 1.30 pm
  • Session III: 1.30 pm to 3.30 pm

As a rule of the thumb, all intraday trading strategies should be backed by exceptionally high volumes. High volume is an essential input even by the Dow theory. Historically, stock markets witness comparatively higher volumes and trending prices in sessions I and III, making them more lucrative for day trading. 

Session II is often the ‘lunch break’ (as the market participants like to call it). Therefore, the market is generally range-bound in this time, making no significant move on either side. 

Related: How to turn stock market volatility into an investment opportunity?

6. How profitable is intraday trading?

One of the things intraday traders must do is treat trading as a full-time business rather than just another adventure sport. Indeed, consistent precision and efforts to back-test the strategy and stay by it can make you a profitable trader. 

Intraday trading is all about making small profits with multiple trades and higher volume. It is important to book profits quickly because not every day sees highly trending markets with huge profits. One must also be careful to avoid overtrading because this can lead to higher transaction costs and affect profitability. Look at these proven investment strategies that can be considered for volatile market. 

7. How are the profits from intraday trading taxed?

Income from intraday trading is considered to be speculative income. This is allocated under the head "Income from business or profession". If you make a profit, then it gets added to your total income and you are taxed as per your income tax slab.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.

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