Intraday trading basically means ‘within the day.’ In finance, it refers to things like stocks and exchange-traded funds that are bought and sold during normal business hours. It also refers to the highest and lowest prices that an asset reaches during the day. This is important for people who make a lot of trades in a single day, like day traders. They buy and sell quickly and close all their positions when the day ends.
Basics of Intraday Trading
Intraday refers to what happens to a particular stock’s price during a single trading day. When we say “a new intraday high,” it means the stock reached its highest price of the day compared to all other prices during that day. Sometimes, this highest price can be the same as the closing price when the market ends for the day.
Traders closely watch these price changes as they happen in real-time, using charts that update as the day goes on. They do this to try and make money from short-term price movements. Depending on their trading style, some traders use different time intervals for these charts. For example, short-term traders often use one-minute, five-minute, 15-minute, 30-minute, and 60-minute charts to make quick trades during the trading day. A specific type of trading called ‘scalping’ focuses on very fast trades and usually relies on one-minute and five-minute charts. However, there are also intraday strategies that use 30-minute and 60-minute charts for trades that last a few hours. It’s important to note that while intraday trading can offer opportunities for profit, it also comes with higher risks.
To make trades more efficient during the trading day, some traders use a strategy called ‘Volume Weighted Average Price’ or VWAP. This strategy helps their orders get filled at prices that represent the average trading price of a security throughout the day. Essentially, VWAP orders give traders exposure to a variety of prices over the course of the trading day and provide an averaged price for that security’s trading activity.
How to do Intraday Trading?
Intraday trading involves buying and selling stocks listed on a stock exchange within the same trading day. The main goal of this type of trading is to make a profit by taking advantage of price movements in a single day while also minimising the risks associated with holding stocks for an extended period.
1) Choose Highly Liquid Stocks
Intraday trading relies on the ability to quickly buy and sell stocks. So, it’s crucial to pick stocks that are highly liquid. This means shares of small and mid-cap companies that are easy to trade and tend to experience significant price changes due to market fluctuations.
2) Analyze Cyclical Variations
To make informed decisions, it’s important to study a stock’s 52-week high and low values. This analysis helps you determine whether it’s better to take a long (buy) or short (sell) position in that stock.
3) Consider Volatility
The best stocks for intraday trading typically have medium to high price volatility. Avoid stocks with price fluctuations of more than 3% since the risk of losses is substantial in case the market takes a negative turn.
4) Look for Strong Correlation
It’s a good idea to buy stocks that have a strong correlation with a benchmark index from a reputable stock exchange. When the index value fluctuates, you can expect significant price movements in these stocks. Benchmark indices often consist of shares from top companies, which tend to move upward over time, barring any unusual economic events. Following this rule can lead to substantial capital gains through intraday trading.
5) Pay Attention to Trade Volume
Intraday investors should keep an eye on the trade volume index of a particular stock. High trade volume can indicate either a surge in demand or an oversupply of the stock, depending on the company’s performance. You can profit from both buying and selling transactions in situations like these.
Intraday Trading Strategies
Traders have a variety of tactics they use for intraday trading, such as:
> Scalping: This method aims to make lots of tiny profits by capitalizing on small price fluctuations that occur during the day.
> Range Trading: Here, traders focus on specific price levels called support and resistance to decide when to buy and sell stocks.
> News-Based Trading: This strategy takes advantage of the increased market excitement and price swings caused by important news events.
> High-Frequency Trading (HFT): These approaches rely on complex computer algorithms to exploit brief market irregularities or opportunities for quick gains.
Advantages and Disadvantages of Intraday Trading
Intraday trading has its advantages and drawbacks. On the plus side, it shields your positions from the risks posed by negative news that can impact stock prices overnight. This includes crucial economic reports, earnings news, and broker recommendations that come out before or after the market’s regular hours.
There are several other benefits to intraday trading. It allows for the use of tight stop-loss orders, which are like safety nets to limit losses on long positions. Additionally, it offers increased access to margin, effectively giving you more buying power. Moreover, intraday trading offers plenty of learning opportunities for traders to sharpen their skills.
However, every silver lining has its cloud. Intraday trading also comes with its downsides. It may not provide enough time for your positions to accumulate significant profits, or sometimes, any profit at all. Plus, frequent trading leads to higher commission costs, which can eat into your potential profits.
- Your positions aren’t vulnerable to overnight or off-hours market moves.
- Tight stop-loss orders help protect your investments.
- You can access greater leverage for trading.
- It’s a hands-on learning experience for traders.
- Multiple trades mean higher commission expenses.
- Some assets, like mutual funds, may not be available for intraday trading.
- There might not be enough time for your positions to generate profits before you have to close them.
- Losses can pile up quickly, particularly if you’re using margin to finance your trades.
Stock Market Mistakes to Avoid for Financial Success
Investing in the stock market can be a powerful tool for building wealth over time. However, it’s also a place where investors can make costly mistakes that can derail their financial success.