Risk Management in Intraday Trading

Intraday trading is a high-risk, high-reward and complex trading strategy where traders buy and sell assets to make quick profits throughout the day. It carries very high risks of losses as traders are exposed to sudden price fluctuations that can wipe out their initial investment. Moreover, many day traders use leveraged products, futures and options that further amplify their risks.

Unfortunately, many people are unaware of the risks involved and do not understand how risk management in intraday trading works. Here’s a guide on risk management that we have crafted for you to read before you start your day trading journey. 

What is Risk Management for Day Trading?

Intraday risk management is the process of identifying, monitoring, and mitigating potential losses associated with day trading activities. It involves a range of techniques and strategies that preserve capital, reduce exposure to market risks, and optimise returns. Due to the high inherent risks of this strategy, risk management is essential for day traders.

Why is Risk Management Essential for Intraday Traders?

Intraday trading carries higher risks than other forms of trading, which makes it important for traders to be more careful. Not only does day trading carry the risks of exposure to significant market volatility and major economic events, but it also carries high liquidity risks, lack of transparency and psychological risks arising out of biases. 

Intraday traders need to have discipline and the ability to remain calm under pressure. Emotional decisions made due to rapidly changing market conditions can lead to significant losses. Even the most experienced investors can fall prey to common emotional biases. 

According to a 2024 study by the Securities and Exchange Board of India (SEBI), an alarming number of traders are unable to control the risks of intraday trading. In just FY23, seven out of 10 day traders lost their initial investment and spent an additional 57% on trading costs over their losses. This illustrates the importance of a robust intraday trading risk management strategy. 

Risk Management Tools and Strategies for Intraday Trading 

Day traders use a variety of tools and strategies to limit their risks and increase their return potential. Here are some of the most commonly used tools and strategies:

• Stop Loss: A stop-loss order is one of the most common tools used by intraday traders to limit the risk of unpredictable market movements. It triggers a buy or sell order automatically when the asset price reaches a specified limit. This cuts your losses short. 
• Take Profit: A take-profit order is similar to stop-losses except that it lets you exit with profits. Once a specific target profit price is reached, a trade is automatically triggered, allowing you to close your position. 
• Trailing Stop Loss: Similar to a regular stop-loss, this type of order lets you adjust your exit strategy according to market movements. For example, a 4% trailing stop loss order will increase your exit price by 4%. 
• Support and Resistance: Support and resistance levels are variable points on a price chart with which you can set your entry and exit points. The support is the level below which a stock price does not fall, while resistance is the level beyond which it does not rise. 
• Risk per Trade: Whenever you enter a trade, you must ensure that a single trade is more than 1-2% of your total capital. To calculate per-trade risk, deduct the stop-loss price from the entry price and multiply it by the position size. 
• Risk Reward Ratio: This is the measure of your potential gains against potential losses. Ensure that you have a risk-reward ratio of at least 1:2 so that you make profits even if you lose some of your trades.

Risk Management Tips for Intraday Trading

Here are some of the most effective intraday trading risk management techniques you should employ in your trades:

• Set Better Win/Loss Parameters: To be a successful trader, you must balance your wins and losses to ensure overall profitability. Even if you lose most of your trades, you can make overall profits if a few wins have a very high profit margin. 
• Avoid Volatile Stocks: While a moderate amount of volatility helps you find opportunities, you should generally avoid highly volatile stocks. Since trades are closed within the day, a large price swing opposite your position can result in massive losses. 
• Follow the Market: Since most stock prices move with the market, following the market is a better strategy than taking a contrarian position. This will give you better win chances on most days. You can analyse price charts with pivot count and moving averages to predict market trends and place long/short orders accordingly. 
• Hedge Your Bets: Hedging strategies involve taking an offsetting position to limit your maximum potential loss. This ensures that no matter the outcome, your investment capital stays protected. If you buy shares, you can hedge your position by shorting or buying a future or option. 
• Diversify Your Trading Portfolio: If you hold multiple positions, ensure to diversify your bets across different asset classes, sectors and trading strategies. By distributing your capital, you can mitigate the impact of a single loss.

The Bottomline 

Due to the high inherent risks of intraday trading, traders need to control their potential losses, lower risks and increase win rates to be successful. With efficient risk management in intraday trading, people can navigate their way in the fast-paced market with confidence. Beginners must master essential techniques like diversification, hedging, position sizing, etc., to ensure profits.

Disclaimer: This content is solely for educational purposes. The securities/investments quoted here are not recommendatory.