Beginners guide to intraday trading
Did you know that only 2-3% of India's population is invested in the stock market? This is a serious financial opportunity missed as the Indian stock market has created a lot of wealth for people who have invested in it.
There are many factors that influence people into shying away from the stock market, but the most evident one seems to be lack of in-depth knowledge of how it functions.
Here is a beginners guide to 'intraday trading' to help you gather knowledge of the stock market in the event that you are considering trading stocks.
Intraday trading, also called day trading, is the buying and selling of stocks and other financial instruments within the same day. In other words, intraday trading means all positions are squared-off before the market closes and there is no change in ownership of shares as a result of the trades.
Squaring off is a trading style used by investors/traders mostly in day trading, in which a trader buys or sells a particular quantity of an asset (mostly stocks) and later in the day reverses the transaction, in the hope of earning a profit (price difference net of broker charges and tax)
Until recently, people perceived day trading to be the domain of financial firms and professional traders. But this has changed today, thanks to the popularity of electronic trading and margin trading.
Now, it is very easy to start day trading.
Difference between intraday trading and regular trading
There's only one difference between a regular trade and intraday trade. It lies in taking the delivery of the stocks.
In intraday trading, you square-off your positions the same day. So, your sell order offsets your buy order. This way, there is no transfer of ownership of shares. A regular trade gets settled over a span of days if not longer. So, you get delivery of the shares you bought while the shares you sold move out of your demat account .
Who is intraday trading suitable for?
Those who can take risks, and have enough time to follow the market closely and time their trades.
Risks
Intraday trading promises high returns and thus may sound very attractive. But it also carries a higher risk compared to the delivery segment. So if you have a day job that requires your full attention for most of the trading hours, you may want to avoid intraday trading.
It is crucial that you watch the market and time your trades to perfection. Secondly, you need a good understanding of and time to perform technical analysis on daily charts to make the right decisions.
How to place place intraday trades?
You need to trade in the intraday segment using the right broker, one who offers you with research support as well as technical support. Having the right tools is crucial to maximise intraday trades. Given the high frequency of transactions, it is important that you choose an account with low brokerage per transaction and speedy execution.
What type of stocks should you choose for intraday trading?
In intraday trades, you need to square-off your position before the market closes. So, it is essential that you choose stocks that have enough liquidity for executing such trades. This is why many recommend high liquid stocks like large-cap stocks. This can also minimise the chances of your trades impacting the share price of the selected stock.
When to carry out intraday trades?
Timing the market is crucial for intraday traders. Taking a position at the wrong time can make all the difference to making profits or suffering losses.
Many experts suggest that it may be better to avoid taking a position within the first hour of the trading. This is because the market tends to be volatile during this period.
Why you should consider intraday trading
Intraday trading has its advantages and here are some of them:
1. Higher margins available to traders compared to investors
2. High return potential
3. Lower brokerage charges
4. Short-to-medium horizon for strategies to pay off.
But always remember that it is important to analyse if you are ready to handle high risk and are willing to put extra effort into analysing market behaviour on a daily basis.
How to get started?
It starts with opening a trading and demat account. If you already invest in the stock market, you may want to open a separate account for intraday trading.
You can then sign up for the right tools that help with intraday trading. It can also help with managing your taxes as intraday trades are treated differently as per the Income Tax Act rules.
Once you have the requisite tools and accounts, you can begin by looking at daily charts to identify trends in price movement. For this, you may need the support of various technical analysis tools. You can get access to these tools on trading terminals and software TradeSmart or KEAT ProX.
What is value area and why does it matter?
As an intraday trader, you want to pick the market direction early. The simplest way to do this is by identifying the 'value area' for the stocks you target to trade in. This can help you make a trade decision.
Experts call this 'The 80% rule'.
Value area is the range of price where at least 70% of previous day’s trade took place. Once you have identified this area, observe where the price opens for the day.
The rule states that if the price starts below the range and stays there for the first hour, then there is an 80% chance that it will rise into the area.
On the other hand, if it starts above the value area and stays there for the first hour, there is an equal chance that the price will fall into the area.
The most basic intraday trading strategy is that if the stock starts above and stays there, you may want to take a short position near the top of the value area.
Similarly, if the stock starts below the value area and stays there for an hour, you can take a long position near the bottom of the value area.
While these above tips can be considered thumb rules of intraday trading, they are not expert recommendations.
Last but not the least, don’t forget to set a stop-loss to cover for the 20% chance of the stock not filling the value area.
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