- Date : 29/09/2020
- Read: 4 mins
Intraday trading can be lucrative, but is also risky
When you start investing, you will come across the term ‘intraday trading’, and you may wonder, ‘What is intraday trading?
Intraday trading, sometimes also referred to as ‘day trading’, is the practice of buying and selling the same number of stocks of the same company in one single trading day before the market closes, so as to make profits from the movement of the market indices.
In regular trade, settlement can take several days while shares bought are delivered to the investor or shares sold move out of their demat account. But with intraday trading, there is no transfer of ownership of shares, as positions are squared off the same day.
Related: What is algo trading? How foolproof is it?
Pros and cons
Intraday trading has some advantages and disadvantages. Let’s see what these are:
- Off-hour and overnight developments do not affect positions
- Stop-loss orders can protect positions
- Regular traders enjoy increased leverage
- Multiple trades enhance hands-on experience
- More trades mean more commission costs
- Mutual funds are off-limits
- Time to realise a profit is always an issue
- Losses can mount quickly
Related: Important things to know before investing in the stock market
How to go about it?
Before the advent of e-trading and online trading houses, it was mostly seasoned investors, financial institutions, brokerages, and trading houses that were involved in day trading. Today, thanks to technology, even novices can participate.
Here are a few intraday trading tips to help you along:
- Shun volatile stocks: It is advisable to track stock movements to identify stable stocks; stay away from any that seem unstable.
- Avoid penny stocks: Trading in penny stocks – those with low market price (say Rs 10–20) and low market capitalisation (usually below Rs 100 crore) – will not fetch good returns; it is safer to invest in large-caps and blue chips.
- Research: Ideally, you should perform a technical analysis on daily charts to make the right decisions, so research well before trading. About two-thirds of the trading in the previous session happens in what traders call the Value Area; it reflects potential areas of support and resistance, and also the potential for the following session.
- Trends: It often makes sense to follow market trends to avoid missing out. Opportunities often arise from news breaks. For a beginner, it can be one of the best indicators for intraday trading.
There are many intraday trading strategies that are commonly practised. Here are some of them:
- Scalping: In this method, traders attempt small profits on small prices changes through the day.
- Range trading: Here, traders use support and resistance levels to determine their buy and sell decisions.
- News-based trading: Sometimes, traders seize trading opportunities arising from market volatility following news events. This comes in handy when there is no intraday trading software.
- High-frequency trading: Traders also use algorithms to exploit short-term market inefficiencies (that is, when a stock price doesn’t reflect its true value).
Intraday trading can be lucrative. However, stay away if you:
- Have a low risk appetite, as there's definitely an element of risk involved
- Are busy with your day job, as you must monitor the market to time your trades
- Feel you are not equipped to identify the best stocks for intraday trading
- Have funds constraints, as you need sufficient capital to exploit intraday price movements
- But if you are brave – and prepared – you can make a killing!
Disclaimer: This article is intended for general information purposes only and should not be construed as insurance or investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.