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Intraday Trading and Its Benefits, Features, Tips and Strategies

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What is Intraday trading?

Intraday trading is also known as day trading. As the name suggests, ‘intra’ ‘day’ is buying or selling of securities within a day. Trader purchases and sells a security in a single day session in the market and position is squared off before market closes.

There is no actual delivery of security, traders take advantage of price fluctuation within a day to profit from it. Intraday trading reduces the need to have funds invested for long in the market. It is suitable for investors looking for quick turnaround and opportunity to trade in

How does Intraday trading work?

Let us take an example. You select shares of X company for intraday trading based on your research and analysis. The share price is Rs 200 at 11 am. You buy 1000 stocks of X. At 2 pm the share price moves to Rs. 210 with upward market momentum. You sell the stock and make a profit of Rs 10*1000 = Rs 10,000 within a few hours.

Since both buy and sell transactions were settled within a trading day, the shares are not transferred to your demat account. Only the fund transfer takes place.

Intraday trading requires an online trading platform and technical analysis tools to study market and stock price movements and trends and take a trade accordingly.

Intraday trading is different from regular trading where traders take positions which are squared off within days or even weeks. The shares are credited to demat account and investors can hold the security for a long term.

Intraday traders research the markets and practice technical analysis everyday to study market trends and apply various strategies to trade. Intraday trading also involves more time and effort as well as risk appetite and swift decisions.

Markets within a short span can be very volatile and traders need to make quick calls on buying and selling. They need to monitor the markets and their trades closely. Intraday trading involves more time invested in trading compared to regular trading.

Features of Intraday trading

Intraday trading is executed through online trading platforms like regular trading or investing. Prior to placing an order, you will see a prompt to select Delivery or Intraday Trade.

Once you select Intraday, you can select a stock and place a trade. The transaction is settled on the same day, but if you do not square off the position, it is automatically squared off at the closing price of the stock for the day.

Advantages and disadvantages of Intraday trading

Every investing method has its own advantages and disadvantages, so does intraday trading.

Advantages

The biggest advantage of intraday trading is liquidity and short timespan. Your funds are not blocked for a longer duration, you trade within a short timespan and funds are available to you again for next trade.
You can trade even with a small corpus, there is no need to have a substantial amount of money to trade. Some traders trade with profits they make initially, while safekeeping the principle.
Unlike stock investment where you invest for the long term, intraday trading is an ultra short term investment that frees up your funds with quick turnaround time.
Intraday trading also saves cost as there is no delivery of shares in or out of your demat account.
You can avail margin or leverage for intraday trades as the square of time is short, unlike long term stock investment.

Disadvantages

Intraday trading is dependent on ultra short term market movements which can be erratic and driven by unpredictable events on a daily basis.
The risk is very high in intraday trading due to short term nature and market volatility.
Moreover, traders need to study the market very closely all through the market day to predict movements and make quick decisions.It can be a time consuming and often stressful process.
Intraday trading also leads to impulse buying or selling of shares which can lead to irrational decisions driven by emotions. This enhances the risk.

Intraday trading tips & tricks

While investing takes practice and experience, you can keep a few important tips in mind for intraday trading

Knowledge & Research

Build your investing muscle by keeping yourself updated with current affairs, market news, company fundamentals, basic financial analysis, trading strategies, overall macroeconomic factors etc.

Investible Surplus

Since intraday trading carries high risk, invest only the surplus amount from your portfolio with which you can take risk. It is not advisable to invest your core portfolio for meeting specific financial goals.

Trading Strategy

Before you start trading define your objective, profit target, how much risk you are willing to take and use stop loss feature to cut down your losses.

Liquid Stocks

Select shares with high trading volumes so that there are enough buyers and sellers for the trade and you do not get stuck.

Technical Analysis

There are technical tools that help you study market trends and indicate future movements. Brokers offer advanced trading tools for live technical analysis and trading.

Select Right Broker

It is important to choose a technically sound broking platform that provides easy to use interface, advanced trading tools, quick data, low brokerages and peace of mind.

Intraday trading indicators and time analysis

There are technical indicators that traders use to study various parameters and make quick and informed decisions to manage risk and earn profits. These parameters are

Trend Trend is the general movement of a security or market that shows how price is likely to move. Indicators help to spot and analyze these trends. You can decide your strategy by aligning with the trend.

Momentum

Momentum indicates strength or weakness of a stock’s price by tracking rate of increase or fall in price.

Volume

Volume shows number of transactions at particular price points in a given timeframe. Volume indicators indicate strength or weakness of a price trend.

Volatility

Volatility indicators measure points of high and low price fluctuations indicating trading opportunities or stable price movements.

Overlays

Overlays are various technical indicators plotted together on a price chart to study price trends visually. You can study the price movements and indicators simultaneously to make quick and accurate trading decisions.

Oscillators

Oscillators are technical indicators that oscillate between extreme price points. The bands formed between these values indicate overbought or oversold signals to traders.

Let us look at some of the commonly used technical indicators traders use for intraday trading.

Moving Averages

Moving Average is a simple and most widely used technical indicator for intraday trading. As the name suggests, moving averages draw a trend line by connecting the average closing price of a stock over a period of time.

This trend line plotted over a long period indicates price trends and divergent movements or reversals. A variant of simple moving averages is the exponential moving average which tracks significant recent movements in price by giving added weightage to recent price trends.

Bollinger Bands

Bollinger Bands are slightly more indicative compared to moving averages. Bollinger bands track average price along with upper limit and lower limit. This indicator helps traders study price movement within the band and volatility.

Any breakouts from upper and lower limits are easily identified, presenting an opportunity to traders to track movement within the band and divergence.

Relative Strength Index

RSI is a momentum oscillator that measures speed and change of price movements. RSI is calculated as a score between 0 and 100 indicating overbought or oversold situation and possible change in trends.

MACD

Moving Average Convergence Divergence is a popular technical indicator that tracks moving averages of two different time intervals and a momentum line is plotted using the difference of these two separate averages.

Traders monitor the movement to signal trend reversal and trading opportunities.

How to make profit in Intraday trading

Intraday trading is a popular stock market technique for traders to make money by taking measured risks. At the same time, intraday trading is not a gamble, it is a technical subject and you can learn methods of trading that use logic and patterns.

The best way to make profit from intraday trading is to learn the basics of trading, chart and patterns and technical analysis to control risk and make informed decisions. Traders use Intraday Time Analysis to study a security’s price movement within a day. There are different time interval charts used to monitor price trends.

Hourly Charts

Hourly charts are plotted for a specific time period. Each chart shows high, low, open and closing price for every hour in the selected timeframe. Hourly charts are very useful for trades spanning a few hours or days.

15 Minute Charts

15 minute charts plot stock price’s movement for a 15 minute interval depicting open, close, high and low price movement of a stock. 15 minute charts are useful for trades squared off within an hour.

5 Minute Charts

5 minute charts are most popular among traders to study short term stock price trends and take a quick trading call.

These charts are especially useful when traders trade on very small price changes quickly and profit from them. Also, these charts are helpful in spotting entry and exit points for trades.

2 Minute Charts

Traders use 2 minute charts for scalping, that is, to take quick trading calls on very small price movements to benefit from it.

How to select best stocks for intraday trading

There is no one-size-fits-all formula to select the best stocks for intraday trading. Let’s discuss a few pointers you can keep in mind to select good stocks

1. Liquidity

Stocks which can be easily bought and sold anytime are ideal for intraday trading as a trader needs to enter and exit quickly within a trading day.

There is adequate demand and supply for liquid stocks which can be gauged by trading volume and tight bid price spreads. Illiquid stocks are difficult to sell as there may not be enough buyers for the stock at a given time.

2. Volatility

Intraday trading works on short term volatility in the price of a stock. Select stocks which present medium to high volatility yet not to a level of complete unpredictability.

A highly unpredictable level of volatility means very high risk whereas a range bound volatility in line with other market factors/indices is favourable for intraday trading.

3. Overall Trend

Select stocks that move in line with the overall market and sectoral trends. A stock moving in line with a rising sector will be more profitable compared to a stock in a declining sector.

4. Technical Analysis

Technical analysis is a tool to study past trends and predict future price movements mathematically. A basic knowledge of technical analysis will help you make calculated trading decisions and manage risk.

5. Select the Right Broker

Select a broking platform that offers a wide range of advanced trading tools, price charts and facility to place orders directly from charts to save time.

Also, be mindful of the brokerage they charge. Frequent intraday transactions can add up to high brokerage charges every month

Benefits of intraday trading

If you invest your time in honing your trading skills, intraday trading can be rewarding. Let us look at the benefits of intraday trading

Quick Profits

Intraday trades offer the potential to make profits within a short span of time unlike other investment avenues that are long term and demand monitoring over months or years. However, it also increases the downside risk associated with day trades.

Limited Risk

Since intraday trade wind up within a trading day, the risk due to external factors is limited. For example, long term equity is exposed to macro economic events, geopolitical factors, company and sector specific events etc, which can sway the price and increase risk . Intraday trades have risk limited to market volatility within a trading day.

Lower Cost

Since there are no delivery charges, the cost of trading is nominal for intraday trading as compared to delivery trades. Many brokers offer special pricing for intraday traders which further reduces overall cost of trading.

Moreover, brokers often offer leverage for intraday with lower margin requirement and trader can have a higher corpus to trade with.

Alternative intraday trading methods

Intraday trading is not the only mode of trading available to traders in securities market, one can look at alternate trading methods to expand their trading style

Standard Trading

Standard trading involves buying or selling securities in the market with a medium or long term view. When a trader's price target is reached, the stock is sold. This can span from a few days to a month or year.

The trader gets the ownership of shares in the demat account and can take a square off decision any time. The objective is to earn long term capital appreciation and average out the short term market fluctuations.

Momentum Trading

Momentum trading involves taking advantage of uptrends i.e. buying stocks which are going up and selling when the price is at peak and theron begins on a downward spiral. In short, trader buy on high and sell on a higher price.

After exiting one position, the trader looks for the next momentum stock opportunity. Momentum trading also looks at herd investing in particular stocks following a news or event and cashes out once the trend peaks.

Swing Trading

Swing trading, as the name suggests, involves trading on price swings in a particular stock. Traders buy a stock within a broad range of movement and sell after capitalising on price fluctuation within a short or medium timeframe.

Intraday trading strategies

A moving average crossover is a technical tool that plots more than one moving averages (of different lengths).

It helps traders spot entry and exit points from ongoing trends and reversals. When the two averages crossover and short term average move above the , it signals an uptrend and vice versa.

Reversal Trading Strategy

In this strategy, traders look out for stocks trading very high or very low. The strategy involves taking position against a prevailing price trend and expecting a reversal in price trend direction to happen.

Trader takes position when a price reversal is at maximum volatility and stock price reaches estimated value or support level.

Momentum Trading Strategy

Momentum traders take advantage of upward or downwards trends in a stock’s price. They look at strength or ‘momentum’ in a trend and expect the trend to continue on the basis of strong momentum already present.

Momentum strategy carries higher risk because when momentum is high, the stock gets more attention and prices move further in the same direction until momentum falls and price begins to slide.

Momentum in stocks can build due to fundamental factors or other events and vice versa. Right entry and exit are crucial to profit from momentum trading, traders look at high volume movements as markets open to spot opportunities.

Breakout Trading Strategy

Breakout trading strategy involves identifying opportunities where a stock’s price breaks out from a range in which it has been trading. Traders wait for a stock that has been moving within a range for long and not been able to move beyond. Once there is breakout trader aims to enter at this level and profit from the stock's further direction outside the range.

Pullback Trading Strategy

Pullback trading strategy makes use of small corrections within a larger trend to make an entry. The pullback is not the same as a reversal. The small pullback in trend is a temporary short duration movement after a breakout.

These can be continuous dips in an upward trend after which the trend resumes. Pullbacks can be due to profit booking or temporary events but wider fundamentals or sentiment has not changed.

Bullish Flag Strategy

Bullish Flag pattern strategy is used in a continuous uptrend. The name for strategy comes from the flag and pole pattern formed when pole is the upward rise and square flags are consolidated pattern, only to resume the wider uptrend. The flag doesn't mean a downward breakout but a support or continuation of trend and can result in a new, strong upward rally.

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FAQs of intraday trading

1. Who should participate in intraday trading?

Any resident Indian above the age of 18 can participate in intraday trading as long as they have an active demat and trading account. However you must keep in mind your risk appetite as intraday trading carries high risk. Also you should only invest surplus money and start with a small amount to limit the risk.

2. What are self generated intraday trades?

Self generated intraday trades are buy and sell orders that you place directly through online platforms instead of routing them through a broker.

3. Is there any limit for intraday trading?

No, there is no limit as such for intraday trading. The only limit probably is how much capital you’d like to trade with and your risk taking ability.

4. What is the best strategy for intraday trading?

There are many trading strategies intraday traders use e.g. Breakout trading strategy, Moving average crossover strategy, Gap and Reversal trading, Momentum trading strategy, Bull Flag trading strategy etc. You can learn and use technical analysis and a few beginner level strategies and build your skill from there.

5. Can I sell intraday-shares the next day?

It depends on the broking platform’s policy. If you do not square off your intraday trade, the stock will be delivered to your demat account. Some brokers demarcate intraday trades separately and charge lower brokerages for intraday. Such trades are automatically squared off at market closing hours.

6. How does intraday trading work?

You require a demat and trading account for intraday trading. While placing trades you should select the ‘intraday’ segment. During market hours, you select a stock basis your analysis and technical study and take a position. When the price of the security moves favourably you can exit your position but within the same trading day.

In case you do not square off a position, it is closed automatically at the end of trading hour. Intraday trades do not involve delivery of stocks in your demat account.

7. What is the best time for intraday trading?

There is no specific ‘best’ time for intraday trading, markets are open for intraday trades between 9.15 am to 3.30 pm.

However, some traders profess that early hours after markets open work best for them as this hour sees most volatility in stocks and traders have opportunities to take positions. It also provides ample trading hours to observe the market and square off.

Also the volumes are higher in early hours and liquidity is high. There is no hard and fast rule for timing, traders must take their own informed and well researched trading decisions.

8. How do I start intraday as a beginner?

If you are a beginner in the stock market, intraday trading may not be the best option to start with. You can begin learning about stock investing basics, fundamentals of companies, trading concepts and processes etc.

Once you understand the basics of stock market investing you can learn the basics of technical analysis, common trading terms and strategies and begin with a very small amount.

You can also take dummy trades to hone your skill. Intraday trading involves taking very short trading calls during market hours and trades are squared off automatically if not settled.

9. Is Intraday profitable?

Intraday trading can be profitable with some experience and knowledge about stock markets and trading strategies. However one should not trade on tips but take informed trading decisions.

Intraday trading is not a gamble and requires investment of time, skill and experience to succeed. Also one needs to assess his/her risk appetite and control emotions in uncertain times.

10. How much can I earn as a beginner in Intraday trading?

There is no limit to how much you can earn with intraday trading or stock markets. Your earning potential depends on your time, skill and capital.

11. What is stop-loss order?

Stop loss order is a feature which traders use to limit their losses. Stock markets are volatile and no one can predict which way markets will move, especially in the short term. By placing a stop loss order, you can place a limit on the maximum loss you are willing to take in a falling market.

For example, if you buy a stock at Rs 100 and place a stop loss at Rs 80, it means, in case markets and stock price fall, a sell order will be activated automatically once the stock price reaches Rs 80. Therefore your loss is limited to Rs 20 per share. This feature is very useful in short term or intraday trades.

12. Which indicator is best for intraday trading?

Most commonly used and one of the best indicators for intraday trading are moving averages, RSI (relative strength index), moving averages, Bollinger Bands, Volume, MACD etc. Indicators assist traders in spotting trends and reversals, and also study overbought or oversold conditions.

13. Which time frame is best for intraday trading?

Intraday traders use price charts across various timeframes to study and analyse price movement and volumes. These charts plot price action in different timeframes like 1 minute, 2 minute, 5 minute, 15 minute, 1 hour etc.

These timeframes help them observe price movements during a trading day and spot opportunities, trends and reversal. The charts show open and closing prices and low and high prices for the selected time interval.

14. How to learn intraday trading?

If you are a beginner, it is advisable to learn stock investing first and then move to intraday trading. Equip yourself with basic knowhow about markets, how they work, stock fundamentals, basic financial reports analysis, learning about a business, investing process, terms, methods etc.

Once you have some experience in the market, you can gather knowledge about trading, technical analysis, indicators, strategies etc and start with a very small amount.

In the beginning use stop loss to limit any downtrend. You can read financial news that impact the market and monitor daily market movements and analysis. With time, you will learn the ropes and methods of intraday trading.

15. How is intraday trading different from regular trading?

Intraday trading involves taking positions and squaring them off within a trading day. There is no delivery of shares in your demat account. The cost of intraday trading is lower compared to regular trading and the risk is also higher. You need to keep aside time during the market hours to closely monitor the market movements and take quick calls.

Intraday trading can be done even with a very small corpus as you can take trades with the same amount everyday after exiting the previous day.Regular trading takes a medium to long term view of investment and does not involve short term risky bets.

Shares are delivered to your demat account and you can trade them when price is favorable in future. Regular trading involves higher market risk due to time exposure.