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What is Intraday Trading?

Intraday trading is the process of purchasing and selling stocks within the same day before the market closes. The purpose here is not to invest per se, but to trade for quick gains by controlling the stock indices movement. Hence, the changes in the share prices are tracked closely to earn profits from stock trading.

The most important thing to keep in mind when doing intraday trading is to specify the respective orders to intraday trading; if one fails to do so, their broker may square off your position, or convert the trade into delivery.

Basics of Day Trading

As mentioned, intraday trading, also referred to as ‘day trading’ by many traders is the buying and selling of the stocks on the same day. As easy as it is sounds, it might be riskier than regular stock market investing. Thus, it is imperative for traders, especially beginner traders to understand the nitty-gritty of such trading technique to avoid any losses.

Now, how intraday trading works? Let’s assume a person buys certain stocks of a company, then first and foremost, they must specifically mention ‘intraday’ on whatever platform used for investing. This indicates to the broker that the user intends to trade the stocks of the same company on the same day before the market closes.

If a certain stock opens a trade at Rs 600 but jumps to Rs. 660 within a couple of hours. If 1,000 stocks were bought in the morning and sold at Rs 660, a profit of Rs. 60,000 would be made straight away in just a few hours.

Intraday Trading Indicators

Whether a person is a seasoned or a new investor, he/she may struggle to face multiple events happening simultaneously in intraday trading. Therefore, keeping an eye on the trends and indicators can be of great help while doing intraday trading in India. Here are some of the indicators that can be considered during day trading:

Moving Average

The term averages are taught in school and we all have learned it. The term ‘moving average’ is just the extension of the same. The moving average is a trend indicator that is represented as a line on the charts showing the behaviour of a stock over a specific interval of time. These charts depict the opening and closing rates of a particular stock. The minimum average line on the chart shows the average closing rates of the stock in that interval. This helps to deeply understand the fluctuations in the price and determine the flow of the stock.

Bollinger Bands

These are also one of the most popular technical analysis tools that show the standard deviation of the stock. It has three lines – the moving average, the upper limit and the lower limit. These lines represent a band or a volatility range in which a particular stock price moves up or down. These variations in the stock price over a particular time period helps to locate the price variations and one can invest with the help of these observations.

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Momentum Oscillators

The stock prices mainly depend on the market situations and are highly volatile. Momentum Oscillators helps a trader to know whether a stock would rise or fall over a given time period. It is represented in the range of 1 to 100 and shows whether a stock would further rise or fall. This, in turn, helps a trader to determine the right time to buy a particular stock.

Relative Strength Index (RSI)

The relative Strength Index is a momentum indicator that is beneficial in technical analysis. It measures the extent of price change of the stock in a period of time. It also ranges from 1 to 100 graphically represents when a particular stock is bought or sold the highest. When the RSI is over 70, it is considered as overbought and oversold when less than 30.

The formula used for this calculation is:

RSI = 100 – [100 / ( 1 + (Average gain / Average loss ) ) ]

How to Select Stocks for Intraday Trading?

It is essential to identify best intraday stocks while undertaking such investments, as it has relatively higher risks.

Choose highly liquid stocks 

Liquidity is a prime feature of intraday stocks, as without this feature such trade would not be possible. Equity shares of small and mid-cap companies can be easily bought and sold, as well as experience tremendous volatility due to market fluctuations.

The cyclical variations should be carefully observed by analysing 52-week high and low values, as it gives a precise idea about whether an individual should assume long or short positions while investing.

Volatility 

Best intraday stocks tend to possess medium to high volatility in price fluctuations. Generally, market value fluctuations of more than 3% should be avoided while performing intraday trading, as the possibility of incurring a loss is huge in case of an adverse downturn in the stock market in an economy.

Strong correlation 

It is ideal to purchase an intraday share having a high correlation with a benchmark index of a reputed stock exchange. Thus, substantial movement in share prices can be observed when the index value tends to fluctuate.

Since benchmark indices consist of shares of top companies listed in a stock exchange, it can be assumed that fluctuations will move in an upward direction, barring any economic abnormalities. Thus, capital appreciation through intraday trading will be substantial if this rule is followed.

Higher trade volume

Intraday investors can track the trade volume index of a particular security to identify price fluctuations. A higher trade volume index reflects either excessive demand or supply, depending upon an underlying company’s performance. Capital appreciation gains can be earned through both purchase and sale transactions in such cases.

Benefits of Intraday Trading

Transacting in intraday share has the following advantages:

Lower risk 

Since securities are purchased on the same day in intraday trading, the risk of incurring substantial losses are minimized. However, in the case of standard trading wherein the principal is kept locked in for a considerable period, changes in price can be significant, making an investor worse off in case of stock market downturns.

Lower commission charges 

Stockbrokers charge nominal fees while transacting in intraday trading stocksas delivery expenses of transferring security in the name of an investor are forgone. Stock transaction tax, trade fees, services tax, etc. are all-inclusive in brokerage fees, and such deductions reduce the income of an investor.

Generally, brokerage fees on intraday trading stocks are one-tenth of what is levied if standard trading is undertaken.

Higher profits 

Intraday trading is known to yield massive wealth creation for investors, provided accurate investment strategies are applied. Capital appreciation in a rising stock market can be achieved easily. In case of adverse market conditions, intraday share traders use the method of short selling to earn profits.

Liquidity

Another benefit of intraday trading is that total financial resources invested can be quickly recovered at any time. It is not blocked through an asset purchase transaction. This preserves the liquidity requirements of an investor to meet any personal needs.

Capital gains through market fluctuations

Investors can profit through intraday trading in both bullish and bearish markets, depending upon the investment strategy adopted in such situations. Capital appreciation in a bullish market can be achieved by the purchase and sale of securities listed on a stock exchange. In the event of a stock market downturn, profits can be generated through short-selling financial instruments.

Associated Risks

An investor needs to have extensive knowledge about the intricate workings of the stock market for realizing adequate profits. It may seem overwhelming for a novice investor looking to generate capital gains. It is essential to select securities of appropriate companies in such cases, for which precise analysis of financial records is required to be done.

Market volatility plays an important role when it comes to intraday trading stocks. In case of unexpected market fluctuations, investors can incur losses. Technical analysis of markets is based on past volatility, and thereby, might not be 100% accurate in all instances.

Alternative Trading methods to Intraday

Investors wary of intraday trading in the stock market can choose from various trading methods, such as:

Standard trading 

Under this trading method, individuals can invest in stocks of different companies. It is generally undertaken for a more extended period, wherein investors can profit from both capital appreciation and periodic dividend payments.

However, such trading has to be done through a brokerage firm, wherein the percentages of total profits are deducted as payments. As periodic receipts from investment securities are obtained, brokerage fees only consume a small portion of the entire income generation. Additionally, many brokerage firms provide advice regarding the most profitable investable securities in the market, acting as a stable investment option for novice investors.

Momentum trading

Capital appreciation is the primary target in momentum trading. Investors purchase securities having a high potential for growth in the future, but the prices are suppressed due to market fluctuations. Relative or absolute momentum investment strategies can be implemented, wherein stocks of companies underperforming either in a relative or absolute sense can be chosen.

Swing trading 

Similar to momentum trading, swing trading generates capital gains through short term investment strategies. Volatile stocks are targeted in such cases and procured shares are sold off as soon as a massive movement in prices is witnessed.

Intraday trading can be undertaken depending upon an investor’s knowledge about the stock market. Individuals who do not possess such extensive information can research online about the same before embarking on such investments.

Intraday Trading – FAQs

Que. What is the difference between intraday trading and delivery trading?

Ans. The primary difference between Intraday trading and delivery trading is the time period of the delivery of the shares. If done on the same day it is called Intraday and if done over a period in time, it is called delivery trading.

Que. Which is the best indicator for intraday trading?

Ans. The four basics for Intraday trading to always remember are:

  • Trend
  • Momentum
  • Volatility
  • Volume

You can choose any indicator listed in this article for intraday trading.

Que. What is a stop loss and why is it important in intraday trading?

Ans. Stop-loss is a trigger that gets activated when the minimum price of a stocks gets hit. It is necessary as it can help to minimise financial losses.

Que. How to find stocks for intraday trading?

Ans. Always choose stocks with the best Liquidity as it is the major criteria for selecting any stock in intraday trading.

Que. With how much money one can start intraday trading in India?

Ans. There is no fixed amount to start intraday trading. One can also start with as low as Rs. 5000 and if you have enough savings, intraday trading can also be started with a huge sum such as Rs. 2,00,000. However, keep in mind to select a genuine stock broker for the same.

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