In the past few years, the popularity of Intraday trading has risen owing to reduction in trading charges, faster & stable internet access, rising awareness of stock markets, and increased income. If you came to this article looking to get started on Intraday trading, then you have come to the right place.
What is Intraday Trading?
Intraday means within the day. In the financial world, intraday trading refers to buying or selling an instrument within the same day before the market closes. In India, intraday trading starts at 9:15 AM when the market opens and ends at 3:15 PM. However, delivery trade is allowed till market closing time which is 3:30 PM. If a person fails to close his intraday trade, your broker may square off your position with some penalty, or convert it into a delivery trade.
Intraday Trading For Beginners
If a person wants to earn regularly from trading, he/she has to commit a minimum time of 3 years which involves three different stages - Learning, Unlearning and Mastery.
1. Learning is the phase when one starts getting familiar with the stock market. It involves your first trade, first gain, first loss and first disappointment. It is always advisable to put small money in a phased manner or use simulation for trading. One can explore every trick and strategy available on the web but never rely on tips.
2. Unlearning is the phase when a person starts applying multiple strategies. This is the phase when you give up all the “hear-n-say” things. Trading is an art that evolves with your personality. A person can’t become a trader by just copying someone’s strategy.
3. Mastery is when you start realising the real power of aligning your personality with your intraday strategy. A person will be amazed to find that trading is more about personal execution capabilities than a successful strategy.
A person new to intraday trading should blindly follow the 5 golden rules of intraday trading:
Cut your losses: It’s advisable to always put a stop loss in your intraday orders. People are tempted to hold losses and cut profits.
Don’t overtrade: A day can be bad or good depending upon how your initial trades performed. If your first three trades hit stop losses, close for the day and go for a walk. Don’t do revenge trading. Even if you want to sit in front of the screen, close your intraday account and log into the Revenge Trading account. Ideally, you should put small money in this account.
Divide capital into three parts: Capital should ideally be divided into three parts -
(a) Investing Account - In this account, you will buy high quality stocks which are market leaders. It’s only for wealth creation and long term holding. Ideally it should have 50-75% of your savings. You can also buy Mutual Funds with this allocated fund.
(b) Intraday Trading - This is a learning and earning account. Initially you should not put more than 10% of savings in this account. It can increase gradually with experience and profitability but should not exceed more than 30% of your savings.
(c) Revenge Trading - In order to protect your capital on a bad trading day, you must have this account with not more than 1-2.5% of savings.
No company-specific biases: There is a famous saying for intraday traders “I make money on a stock without even knowing its full name.” If one day, your intraday strategy gives a sell signal on a stock you are holding in your investment account, don’t hesitate to short it. It’s only for intraday.
Price and Volume are king: Always focus on price and volume. These are the only two things that are leading indicators to how a stock price is expected to move. Rest of the indicators are by-products.
Some healthy habits of a successful trader are - spend more time on screen, always look towards the left side of a chart when taking a trade, maintain a similar resolution of the screen if using multiple screens, journal your trades daily, analyse your weak and strong sectors. A person might be good at trading FMCG sectors but not with banking ones. Also, identify your favourite stocks, which aligns with your personality. It's very important to find your K-10 stocks like the famous Ketan Parekh.
Benefits of Intraday Trading
Though there is a lot of negativity around intraday trading, some benefits are definitely worth it. If one can master intraday trading, he/she can generate tremendous returns on capital.
- Leverage: Brokers allow leverage on capital for intraday trading. It increases your returns manifold.
- Short Selling: You can earn money by shorting a stock if you feel it’s going to fall. Unlike investing, where money can only be made if a stock goes up.
- Capital Security: You can sleep peacefully without worrying about an overnight event that can trigger a market crash. Your capital is not invested in the market.
How to choose stocks for intraday trading?
Intraday traders earn on two important features of a stock - volatility and liquidity. A good intraday stock should be highly liquid and volatile.
Volatility - The price fluctuations in a stock should be higher in order to capture it during day trading. A sideways movement of a stock price is a big disappointment for intraday traders. Create an excel sheet and populate historic daily change percentages of stocks and choose the one which has higher value either positive or negative.
Liquidity - All intraday positions must be squared off before market close. So a stock should have enough trading volume. Also, high volume stocks have lesser slippages, which may eat up your profit margins.
What is a perfect intraday timing?
It’s always beneficial to limit one’s trading to some specific hour instead of over trading the entire day. You can strategically choose a specific window based on your trading strategy and style. Usually, market time is divided into three parts based on volatility and volume per minute.
- First Two hours: It usually lies from the opening hours at 9:15 am till 11:15 am where the market is very volatile and has high volume trades. A trend is usually built in this phase.
A lot of people ask this specific question - Should I Trade in the First Fifteen Minutes? It is not recommended for a beginner to trade in the first half. Let the market settle and find a good setup in mid-hours.
- Mid-hour: After all the volatility settles down, this time is best for a beginner to trade with a setup for a decent small risk-reward. One can take the Fibonacci retracement trade in this hour.
- Ultimate/ Last hour: Early morning trend may continue again with a breakout during this time. These trading hours usually have quarterly result disclosures. Sometimes it can also have huge volatility.
Apart from looking for a desired time, you can also look for a day of the week. For eg., Monday first half and Friday ultimate hour usually have large speculative trades.
Trading Strategies Of World’s Most Successful Traders
- Jesse Livermore: He successfully shorted the 1929 market crash and made 100 million. He found his edge with an event-driven strategy.
- W D Gann: He was a mysterious trader and had an edge with forecasting methods based on geometry, astrology and ancient mathematics. He also used the square of 9 method.
- George Soros: He made his biggest profit of $1 Billion by short selling currency which was $10 billion worth of pounds with an arbitrage strategy.
- David Tepper: He is wildly successful as a specialist in distressed debt investing
In the end, a person has to master one strategy and keep aiming for best bets within that strategy. The success of a strategy has to be on the execution side and not on the theory side