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Best Strategies for Intraday Trading

  • Marisha Bhatt
  • Jan 06 2022
  • 8 minutes
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Investing in stock markets is no longer considered to be simply an investment option. It has also become a full-time profession for many where they not only invest in shares but also actively trade them in the primary as well as secondary markets. Trading in the share market involves taking suitable positions that have to be squared off within a period of time or within the day itself (intraday trading) depending on the goals of the trader and the market scenario. Intraday trading is a crucial part of trading for any novice or seasoned trader and requires a great understanding of the market fundamentals. 

Given below is the meaning of intraday trading and the key strategies that can be used by the traders for the same. 

What is intraday trading?

Intraday trading is a very risky form of trading in the stock markets. There are many intraday traders currently in India but it is not easy to be a successful intraday trader. It requires years of experience to gain the necessary expertise to time the markets and make decent profits. Intraday trading as the name suggests is the act of taking potentially profitable positions by buying or selling shares and squaring off the trade in the same day i.e., before the end of the current trade session.

Intraday trading is quite a risky form of trading as the volatility is quite high. However, this has not stopped traders from taking a plunge in intraday trading. What makes it exciting is the possibility to earn higher returns as compared to traditional investment modes like Bank FDs, PFs, etc. At the same time, since the positions are squared off on the same day in intraday trading, the entire capital of the trader is freed up at the end of the trading session. 

What are the basic tips for intraday trading?

Some basic tips or pointers that need to be considered while doing intraday trading (especially by new traders) are mentioned below.

  1. Selecting the stocks with a high amount of liquidity as it will help them enter and exit the market easily. 
  2. Select the trade in line with the current trend of the market and not against it. Most seasoned traders also cannot predict the markets with a 100% guarantee, hence it is better to go with the flow.
  3. Analyze the historical prices of the stocks and the company financials to take better trade positions.
  4. Always use stop loss to minimize the chance of losses and make a timely exit from the market or the position taken.
  5. Set a target and stick to it. Book the profits when the target price is achieved and not be greedy. 
  6. Do not be emotionally attached to the trade and exit immediately if the market does not go in line with the prediction. 
  7. Set a time frame for trading. Most traders avoid the first hour of trading as it is considered to be highly volatile. Most traders prefer trading closer to noon and square off their positions before the end of the trading session.
  8. Trade using only surplus funds as this will not create a financial crunch for the traders. This rule or tip is especially important for novice traders.
  9. Set the charts and candlesticks for the stock or the indices in the preferred time frame and analyze them religiously. Most traders prefer to have 5-minute, 15-minute, or hourly charts and candlesticks for their target stocks. 

What are the common strategies of intraday trading?

After focusing on the basic tips of intraday trading, let us now discuss the basic intraday trading strategies that can be used by traders. 

a. Momentum trading strategy

This strategy focuses on the momentum of the market and uses it to make a successful trade. The trader will have to select the stocks based on any latest news and development in any sector or industry that can result in high momentum. They will have to take suitable positions based on a significant change in the market trend and take advantage of such momentum. It is important to act fast in this kind of intraday trading strategy as the amount of profits that can be made will depend on the momentum of the market and the duration of the current trend. 

b. Scalping trading strategy

The scalping strategy is often considered to be the most beneficial trading strategy for most intraday traders. This strategy involves scalping the market for smaller profits and is commonly used while trading in commodities. This strategy requires the assets i.e. stocks or commodities to be highly volatile and liquid to gain maximum advantage and is usually used by high volume and high-frequency traders. This strategy does not focus on the fundamental or technical analysis of the stocks but more on the price action of the target assets. Stop loss is again the traders’ best weapon to curtail losses in this strategy. 

c. Breakout trading strategy

The breakout strategy involves focusing on the stocks that have broken out of their usual band or territory. Such breakout has to be supported by significant volume as a breakout with thin volume is generally not a breakout in a true sense. In this strategy, if the stock breakout is on an upward trend, the trader needs to take a long position and vice-versa. It is important to note the support and resistance in the breakout strategy and implement stop loss accordingly to minimize any losses.  

d. Pull back trading strategy

The pull back strategy focuses on price correction and is used when the price of the stock of the commodity goes against the trend. In this strategy, the trader is presented with a low-risk buying opportunity in a significant upward trend with a pull back. On the other hand, in a downward trend, it will present a low-risk selling opportunity. However, while implementing the pull back strategy, the trader has to note the support and resistance levels as if the stock price goes beyond them supported by volume, it can indicate a trend reversal. 

e. Moving average strategy

This strategy focuses on the moving averages and is also known as the moving average crossover strategy. When a stock generally breaks out of its moving average, traders implement this strategy to take a profitable position. If the stock price goes above the moving average, it signals a crossover to the bullish trend whereas if the stock price goes below the moving average, it signals a crossover to the bearish trend. Most traders and investors also use this strategy to invest in any shares for the short term or long term based on their risk-return expectations. 

Conclusion

Intraday trading is highly volatile and requires traders to think fast and act on their feet. It is important for the traders to understand their risk-reward ratio before taking any trade positions. At the same time, learning the basics about the stop loss function is the key to having successful intraday trading.

FAQs

What are some other intraday trading strategies commonly used by traders?

 Some other intraday trading strategies commonly used by traders are gap and go trading strategy, reversal strategy, bull flag trading strategy, etc.

What are the benefits of intraday trading?

The benefits of intraday trading include the absence of overnight risks, the potential to earn higher returns, higher leverage from brokers, freeing up of capital at the end of the day, etc.

What is the duration of intraday trading?

The term intraday trading refers to trading within a day i.e., within a trading session on any day. Hence, the duration for intraday trading is from the start to the end of any particular trading session.

What happens to intraday positions not squared off?

in case the intraday trader does not square off their buy position, the shares will be treated as delivery trade in the event of enough margin otherwise they will be squared off. In case of a sell position, the trader cannot buy back the shares and if they are held in the Demat account, the same will be transferred to the exchange. If the trader does not have such shares in their Demat account they will have defaulted on their sell trade.

What are the limitations to intraday trading?

The key limitation to intraday trading is the difficulty to track multiple stocks and target the ones that can give a maximum advantage. Another limitation is the ability to act at the right time based on the information received. Many traders act too late to the price action and miss a good trading opportunity.

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