Understanding Intraday trading
Intraday trading involves buying and selling stocks in a single trading day by closing positions at the end of each day and starting over the next day. Day traders buy and sell multiple stocks in the same day, or even multiple times a day, to take advantage of small price changes.
Intraday trading is not for part-time traders as it takes time, focus, dedication and a specific mindset. Intraday trading involves making decisions quickly and executing a large number of orders for a relatively small gain each time. This practice is generally considered to be opposed to most investment strategies, with which one seeks to take advantage of long-term price movements.
What you need to know before starting Intraday trading
There are several key factors that you should consider before you start Intraday trading, as this practice can take much longer than the classic “buy and hold” strategy. In investing, the focus is on long-term market movements. The daily variations then have very little impact on the whole. However, with Intraday trading, we focus on factors that can impact the behavior of the intraday market. These may be factors such as:
- Liquidity: The liquidity of a market is the ease and speed with which it is possible to enter and exit a position. High liquidity is important for day traders as they are very likely to execute many orders throughout the day.
- Volatility: The volatility of an asset, or the speed at which prices move, is an important element for day traders. If high volatility is expected during the day, variations can create many opportunities for short term gains
- Trading volume: The trading volume of an asset measures how often it is bought or sold over a period of time. High trading volume shows the existence of significant interest and is useful in identifying entry and exit points
The five most popular Intraday trading strategies
Intraday trading is not really a trading strategy in itself because it only states that you should not keep a position open overnight. It is simply a style of trading. Some of the most popular day trading strategies include:
Let’s take a basic overview of all these strategies, we’ll cover these strategies in details.
The trend trading strategy
Trend traders try to make gains by analyzing the direction of stock prices and buying or selling them depending on which direction the trend is going.
If the trend is bullish with prices successively reaching higher highs, then traders take a long position and buy the stock. If the trend is bearish with prices successively hitting lower lows, then traders take a short position by selling.
Trend trading is not only used by day traders as it is possible to keep an open position as long as the trend continues. However, if you are Intraday trading you would close your position at the end of the day.
The swing trading strategy
Swing trading is all about taking advantage of short-term price changes on the premise that prices never go in one direction in a trend. Instead, swing traders seek to capitalize on both upward and downward fluctuations that occur over a short period of time.
If trend traders want to take advantage of long-term market trends, swing traders are generally more interested in small reversals in price changes. They try to detect these reversals in advance and capitalize on small market movements
The scalping strategy
Scalping is a short-term trading strategy for making low but frequent profits with a focus on a high success rate. The theory is that it is as easy to capitalize by making small profits very often as it is by placing fewer orders and letting the gains run. Scalping requires having a very strict exit strategy because losses can quickly exceed profits.
Most scalpers close their positions before the end of the day because the gains made on each order can quickly be decimated by overnight funding fees.
The Moving average strategy
Mean reversion is based on a theory that prices, and of course other measures of value such as the price-to-earnings ratio (PER), always revert to the historical average.
This strategy uses technical analysis like moving averages to spot assets whose recent performance has deviated significantly from their historical average. Traders using this strategy take advantage of price returns to their normal path.
Relative Strength Index (RSI) strategy
The RSI indicator signals whether an asset is oversold or overbought using volume and prices rather than prices for the asset only.
It consists of comparing the number of orders placed the previous day with the orders placed during the current day in order to determine whether the cash flow is positive or negative. A reading of 80 or higher indicates overbought and is a sell signal for the trader. In contrast, a reading of 20 or less indicates oversold and is a buy signal.
How to get started in day trading?
- Establish a day trading plan
- Learn how to manage the risk of day trading
- Open and monitor your first position
Establish a Intraday trading plan
Before you start Intraday trading it is important to define exactly what you want to accomplish and set realistic goals for yourself. If you are hoping to make big gains right away, you will be sorely disappointed because Intraday trading takes a long learning curve.
It is also important to determine exactly how you are going to create a methodology for entering and exiting the market and whether it will be based on fundamental analysis or technical analysis. If you choose fundamental analysis, your daily orders will certainly be based on macroeconomic data announcements, company reports and news. On the other hand, if you decide to use technical analysis, you will be more oriented towards graphical trends, historical data and technical indicators.
Learn how to manage the risk of day trading
Creating a risk management strategy is an important step in your preparation. By putting measures in place to avoid the worst case scenario, traders can minimize their potential losses. Risk management tools such as stoploss and limits are an integral part of a trader’s tools.
You will often hear it said that an effective trader closes losing trades quickly and lets winning trades run. This method is as important for day trading as it is for any other strategy. A trader doesn’t have to be always right. On the other hand, he must quickly recognize his mistakes and act accordingly by ensuring that he earns more money from his winning trades than he loses with his losing trades.
One always wonders whether a trader should try to achieve a high win / loss ratio or if he should take a closer look at the risk / reward ratio. Effective day traders will often have low success rates that can even drop below 40%, but they will try to achieve a risk / reward ratio of at least 1: 2: this means that the trader hopes to double the capital that ‘he is willing to risk. This is a factor to consider, but one thing is for sure: there is nothing wrong with making mistakes and suffering a small loss, but continuing to make mistakes and suffering a big loss might be the way to go. fastest way to end your short-term trading experience..
Open and monitor your first position
When your Intraday trading plan is right for you, it’s time to open your Demat account . There are many broker exist but I prefer Zerodha for trading or investing. Before you get into the markets you can practice with paper trading or any market demo software or apps. Once your account is open, you will choose your approach.
In Intraday trading, it is very likely that you will want to open long and short positions. If you think the price will go up, you “buy” the asset, and if you think the price will go down, you “sell” it.
Remember that when you are a day trader you will likely open and close a large number of positions in the same day. It is therefore important to stay on top of market events and news that could impact the prices of the markets in which you invest.
At the end of the day, it’s time for you to close all your still existing positions. One of the most important practices at this point is to keep a trading journal of all the positions you have opened and closed during the day. You keep a record of winning and losing transactions.
Key points of Intraday trading
To help you get started in Intraday trading, we’ve put together a list of the key things you need to know:
- Intraday trading consists of opening and closing positions during the same trading day.
- Traders choose this method to avoid the risk of slippage and overnight funding fees.
- Intraday trading takes a lot of time and dedication. So it’s not used much by part-time traders
- The most traded markets for day trading include stocks, indices, cryptocurrencies and forex
- It is important to consider the liquidity, volatility, and trading volume of a market before starting day trading.
- Many day trading strategies are available to you such as trend trading, scalping, swing trading, Moving averages and RSI etc.
- Before you start trading there are some key steps you need to take, including establishing how you are going to trade, your trading plan, your risk management strategy, and opening your first position.
What do i need to start Intraday trading?
The first thing you need in order to start Intraday trading is a trading plan and strategy. Then you will need to open an account and deposit funds there.
If you are not ready to trade for real, you can open a demo account and practice day trading.
What software do I need for day trading?
You don’t need any special software in order to start day trading. Once your account in Zerodha, you will be able to access our intuitive and multiple award-winning trading platforms and trade from your web browser or directly on your smartphone or tablet.
Can I make earnings from Intraday trading?
In Intraday trading, investors make small gains on a frequent and repeated basis. The amount of these gains then depends on the strategy put in place, the capital available and the risk management.
However, Intraday trading involves many risks. This is the reason why we place great emphasis on training before you start trading. If you want to learn more about day trading as well as other trading strategies, visit our website regularly, we’ll keep posted learning and informative materials for you.