Intraday Trading Jargon Simplified

Bid-Ask Spread

When an investor wants to buy a stock, they will choose the lowest ask price and will look for the highest bid price when they want to sell it. The difference between the Ask and Bid price for a particular stock is the bid-ask spread. It can help the investor understand the liquidity of a particular stock.

Averaging Down

While this is more relevant for long-term stock investors, many intraday traders adopt the averaging down strategy too. This is a method of reducing the average buying price of a stock by purchasing more if the stock price falls. Here is an example:

An investor purchases 100 stocks of ABC Ltd. at Rs.100 per share. Therefore, to book profits, the share price needs to cross Rs.100. An hour later, the stock price drops to Rs.90. The investor purchases 100 more stocks at Rs.90. Now, they have 200 shares of ABC Ltd. at an average price of Rs.95 per share. Therefore, they can book profits if the stock price crosses Rs.95. Another hour later, the stock price falls to Rs.80 per share and they purchase 100 stocks more at this price. Now, the average purchase price becomes Rs.90 per share bringing the investor’s profit price lower. By the end of the day, if the stock price closes at Rs.95 (lower than his initial purchase of Rs.100), the investor still manages to book a profit of Rs.1500 as opposed to a loss of Rs.500 (if they had not averaged down).

However, this is a risky strategy and should be implemented only if the investor has reasons to believe that the stock price will rise by the end of the day.

Candlestick Charts 

Charts are essential for understanding the movement of prices in the stock markets since they can project complex information in an easy-to-understand manner. A candlestick chart is one such financial chart that allows investors to view the price movements of a security at regular intervals. 

Typically, candlestick charts display multiple bars that look like the sticks of a candle and hence the name. Each candlestick has a solid bar in the center highlighting the open and close prices of the security. There are wicks on either side of this bar representing the highest and lowest traded prices of the said security. There are color codes too allowing traders to understand the price movement relative to the prior closing price too. Spending some time to understand how to read these charts is important before using them to make investment decisions.

Usually, each candlestick represents one day and the chart is created for a month showing around 20-25 trading days and an equal number of candlesticks. However, these charts can be created for shorter or longer intervals and any time frame. 

Margin

Whenever a stock is bought or sold in the market, the stock exchange collects a small amount from the broker as an assurance of the trade. This is called margin. The broker collects this amount from the trader and deposits it with the exchange. There are two types of margins that stock traders need to be aware of:

1. VAR or Value at Risk Margin – This is a percentage of the order amount (buy/sell) charged by the exchange to insure against the maximum probable loss of value of the stock.
2. ELM or Extreme Loss Margin – VAR covers losses on 99% of the trading days. However, there are times when unexpected events can trigger higher losses than those predicted by VAR. This is also collected by the exchange in the form of ELM.

Read More :  Understanding the Concept of Margins

Position

In stock trading, the commitment to buy or sell stocks on an exchange is known as a ‘Position’. There are two types of positions in trading:

1. Long Position or Open Buy Position – When traders purchase shares via an intraday buy order, then they are said to have an open buy position or a long position. The trader must ensure that this position is closed before the trading day ends.
2. Short Position or Open Sell Position – When traders sell shares via an intraday sell order, then they are said to have an open sell position or a short position. The trader must ensure that this position is closed before the trading day ends.

Short Selling

This is a facility available to intraday traders where they can sell shares even if they don’t have them in their demat account. Being an intraday trade, the investors have to buy them back before the end of the trading day. Many traders short-sell if they are confident that the stock price will drop during the course of the day. 

Let’s say that the market price of the shares of ABC Ltd. is Rs.100 and a trader believes that the price will fall during the day. However, the trader does not own any shares of the company. In such cases, they can short-sell the shares even though the trader doesn’t own them at Rs.100. During the course of the day, if the stock price falls to Rs.90 per share, the trader purchases an equal number of shares to square-off the transaction and book profits in the bargain.

Square-off

Square-off is a part of intraday trading that means closing all open positions on the same trading day. Therefore, if a trader has purchased 100 shares of a particular company in the morning, then they need to be sold before the end of the trading day. On the other hand, if a trader has sold 100 shares of a particular company in the morning, then they need to be purchased before the end of the trading day. 

If the trader misses squaring-off the trade, the broker will do it on behalf of the trader.

Stop Loss

This is the most important tool for an intraday trader. It allows traders to limit their losses and reduce risk exposure. The core idea is to minimize losses by exiting the trading position once the stock price reaches a specific level. This is an efficient way of insuring yourself against sudden market movements in an unfavorable direction. You can read a detailed note on stop-loss orders by visiting our blog.

Trading Volume

During a given period, the number of shares of a security traded on an exchange is the Trading Volume of the security. It is a technical indicator of the activity of the said security. Most intraday traders use this indicator to identify and/or confirm if a trend is continuing or reversed. 

Hope this was useful!

Happy Investing!