Intraday trading: Guide for Beginners
A Perfect Guide to starting Intraday Trading for Beginners: If you want to make a livelihood from the stock market, the most popular approach is day trading or Intraday trading. Unlike investing, where you have to wait months and years to book the profits, here gains can be made within hours and sometimes even within minutes.
Moreover, with the advancement of the internet and technology, day trading can be learned and started even from your phone and that too comfortably sitting on your sofa at home. In this article, we’ll cover the step-by-step procedure to start Intraday trading for beginners in India.
Here, we’ll also discuss what is intraday trading, who are intraday traders, thumb rules for day trading, and more.
What is Intraday Trading?
Traders base their profits on different kinds of purposes. One may be a long-term investment which is a gradual process, yet may produce high returns. The other can be a short-term strategy which includes trading with quick gains. One such method is intraday trading.
Basics of intraday trading
Intraday trading refers to buying and selling of stocks on the same day. It is done using online trading platforms. Suppose a person buys stock for a company, they have to specifically mention ‘intraday’ in the portal of the platform used. This enables the user to buy and sell the same number of stocks of the same company on the same day before the market closes. The purpose is earning profits through the movement of market indices. It is also referred to as Day Trading by many.
Stock market earns you great returns if you are a long-term investor. But even on the short term, they can help you earn profits. Suppose a stock opens trade at 500$ in the morning. Soon, it climbs to 550$ within an hour or two. If you had bought 1,000 stocks in the morning and sold at 550$, you would have made a cool profit of 50,000$ all within a few hours. This is called intraday trading.
How to choose stocks for Intraday Trading?
Choice of stocks is the first and the most vital step when it comes to Intraday Trading. So how do we choose stocks wisely? Let us take a look.
Research: Looking, analyzing and comprehending are the basic steps of trading. Nothing goes right without proper calculation unless you really have luck on your side while trading. As luck does not often show its grace, it is always necessary to research before trading.
Trends: Sometimes it's better to follow the herd rather than being a lone wolf. Look for the general flow in the market or the stocks that have raised the most interests in traders. When the market rises, traders must look for the stocks that rise, when it falls, looks for the stocks that show a potential decline.
Avoid volatile stocks: It is always preferable to stay away from what clearly looks unstable. Why put your money in something that might never let you have it back. Hence, it is advisable to track the stock behavior and consider trading over potentially stable stocks.
Here, are Some most Important Steps and Strategies for Intraday trade.
1.Choose Liquid Stocks
What would happen if you wish to sell your stocks but there are no buyers in the market?
As you know by now, intraday trading involves buying and selling a set of shares on the same day before market closing, i.e., squaring off open positions. However, for the stock-exchange to execute these orders, there must be enough liquidity in the market.
Thus the first tip of the free intraday tips for today is to avoid small-cap and mid-cap stocks that may not be liquid enough. Otherwise, there is a high probability that your squaring off order may not get executed, forcing you to take delivery in-stead. Liquidity is the most important criteria you must check before selecting a particular stock to trade in.
Stocks with high liquidity trade at huge volumes which allows intraday traders to buy or sell larger quantities at ease
Experts recommend diversifying your intraday positions across a handful of stocks. Diversification will help you balance your intraday trade strategy and minimize your risk.
2. Momentum trading strategy
Intraday trading strategies are all about finding moving stocks that show fluctuations on an everyday basis. You can find around 25-35% of stocks that show fluctuations. This fluctuation is referred to as momentum. Stock scanners are used to find such stocks. These stocks tend to move above the Moving Average without any resistance in high volume. Momentum in the stocks can be created by a catalyst like earnings but it can also be generated without any fundamental back up. This is called a technical breakout. In momentum trading strategy the traders try to pick up those stocks that move in a single direction in high volume. The profit to loss ratio in momentum trading strategy is 2:1. A trader can hold the stocks for minutes days or hours depending upon the rate of movement of the stocks.
Momentum strategy works best during early trading hours or when the volume is high. If you are alert during opening trading hours, you can make a good amount of wealth through this strategy.
3.Determine Entry and Target Prices
Before placing the buy order, you must determine your entry level and target price. It is common for a person’s psychology to change after purchasing the shares. As a result, you may sell even if the price sees a nominal increase. Due to this, you may lose the opportunity to take advantage of higher gains because of the price increase.
4.Utilizing Stop Loss for Lower Impact
Stop loss is a trigger that is used to automatically sell the shares if the price falls below a specified limit. This is beneficial in limiting the potential loss for investors due to the fall in the stock prices. For investors who have used short-selling, stop loss reduces loss in case the price rises beyond their expectations. This intraday trading strategy ensures emotions are eliminated from your decision.
5. Bull Flag Trading strategy
A flagpole is formed when a strong price movement takes place in a direction. When the resistance line breaks, it starts a new movement and the stocks move ahead. The bull flags are violent in the beginning. This is because it causes breakout and the bear becomes blindside. The bull flag represents a strong price movement in a direction and then there is a pullback in such a fashion that there is a parallel high and low pattern. It takes a lot of time for the bull flag to form and for the formation of the upper and lower line.
6. Moving average crossover Strategy
This is a price crossover strategy in which when the price of the stocks goes above or below the moving average it gives the signal of path reversal. You can see the change in momentum when the price of a stock goes from one side of the moving average to the other side. A crossover below the moving average shows a downtrend while the crossover above the moving average shows the uptrend. This is one of the best Intraday trading strategies formulae.
7.Trade Only with the Current Intraday Trend
The market always moves in waves, and it is the trader's job to ride those waves. During an uptrend, focus on taking long positions. During a downtrend, focus on taking short positions. Intraday trends do not continue indefinitely, but one or two trades (or sometimes more) can be made before a reversal occurs. When the dominant trend shifts, begin trading with the new trend.
Isolating the trend can be the difficult part. Trendlines provide a simple and useful entry and stop-loss strategy. The following chart of the SPDR S&P 500 (SPY) shows several short-term trends during a typical day.
More trendlines can be drawn while trading in real-time to see the varying degrees of each trend. Drawing in more trendlines may provide more signals and may also provide greater insight into the changing market dynamics.
8. Be Patient and Wait for the Pullback
Trendlines are simply an approximate visual guide for where price waves will begin and end. Therefore, when you are selecting stocks for intraday trading, traders can use a trendline for early entry into the next price wave in the direction of the trend.
When entering a long position, buy after the price moves down toward the trendline and then moves back higher. To draw an upward trendline, a price low and then a higher price low is needed.The line is drawn connecting these two points and then extended out to the right. On the chart below, the price bounces off the trendline a couple of times before the price falls through it the third time.
Short selling in a downtrend would be similar. You should wait until the price moves up to the downward-sloping trendline. Then, when the stock begins to move back down, you use this as a trading signal to make your entry.
9. Book Profit When The Target is Reached
Greed is every intraday trader’s enemy. Why, you may ask? It is because it only takes few minutes for the market to switch sides, especially if the market is too volatile.
The secret to successful intraday trading lies in the high leverage and margins that traders enjoy. Leverage and margins help amplify profits (as well as losses). But the trick lies in not getting greedy once that target is reached. Don’t wait for the stock price to increase further if it has reached your target price.
Avoid falling into the trap, where you feel that the price will keep rising (or falling, if you short-sell). You must make trade decisions based on facts and strategies and not on how you feel a stock will perform.
If there is good reason to believe that the price is likely to move in the right direction, then adjust the stop-loss accordingly.
Risk Management
Day trading risk management generally follows the same template or line of thinking. It is most commonly some form of the “one percent rule”.
Namely, it is a rules-based system stipulating that no more than one percent of your account can be dedicated to any given trade. This is done as a matter of prudently managing capital and keeping losses to a minimum.
The “one percent rule” ensures that a trader’s “off days”, or scenarios where the market goes against the trades in the account, don’t damage the portfolio more than necessary.
Effective day trading risk management is the most important skill to learn. And much of what’s involved in sustaining gains over the long run means avoiding material losses of capital.
If you have a 50 percent drawdown, that means a 100 percent gain is necessary just to get back to breakeven. On the other hand, if you lose just 10 percent ideally over a patch spanning several months, not days or weeks (which would signal poor risk management or perhaps bad luck) you need just an 11.1 percent return to get back to breakeven.
Keeping your losses shallow is imperative. When losses deepen, this is also usually when psychology starts playing more of a role, and always in an adverse way. Traders start making worse decisions and can spiral into a “risk of ruin” scenario.
Everything is a probability. Accordingly, you want to avoid betting too much on any given thing, because there is the chance that it’ll go against you. The general strategy in trading or investing more broadly is to make multiple uncorrelated bets where the probability is in your favour. If you can execute this, you will be successful