Intraday trading is also known as day trading. It involves buying and selling stocks on the same day. If you believe that the price will fall, you can short the stock. This means you borrow the stock first and then sell it. The borrowed shares are returned by purchasing them later.
The goal is to take advantage of the short-term movements in price that occur during a trading session. Intraday trading has the advantage of not requiring the stock to be taken into possession. Remember that you must close your position the same day if you are trading intraday. The trading system will automatically close all open positions at 3.15 pm if you forget to do so by the end. At 3.15 pm, it will place an order in the opposite direction of your trade. The order will, therefore, be executed at the current market price.
As an example, suppose you purchased 500 shares of ABC Ltd. at Rs 100 in the morning and sold them the following afternoon when the price increased to Rs 102. You will earn Rs 1,000 in this case (500 shares times Rs 2 per share). If you don’t sell your shares by 3.15 pm, the trading terminal places a market-sell order and shares are sold at the current market price. What is intraday trading?
Margin Available in Intraday Trading
You can choose to use the margin facility when you trade intraday. Brokers usually offer a margin trading facility that allows you to buy more stock than you can afford with your own money. In this arrangement, you pay an amount called margin money for the shares, and your broker lends the rest. The margin can vary from broker to broker and stock to stock.
If ABC Ltd.’s stocks were available with a 25% margin, you would only be required to pay Rs. 12,500 (25% from Rs. 50,000). Brokers will pay the rest. Margin trading allows you to purchase more shares than what you can afford. It also increases your profits.
It may not be all rosy. If the trade fails, your losses can be magnified. You are required to keep a certain amount of your total shares purchased with the broker in order to cover any possible losses. Remember that intraday margin trades can lead to both substantial gains and losses. In chapter 14, we will discuss margin trading with examples.
The margin facility does not only apply to intraday trading. Some full-service brokers offer margins on regular trades. There is one caveat. The trades have to be settled in a certain time frame, which is usually T+90. A high interest rate will apply to the remainder (18%-24% per annum).
The Mindset Of An Intraday Trader
Intraday traders do not consider the fundamentals. This is because it can take days, months, or even years for the market price to match the intrinsic value. We all know that intraday trades have to be settled in the same trading session.
Intraday trading relies on taking advantage of short-term price fluctuations and making multiple small trades in order to generate a large profit. This can be done in both trending stocks and in consolidating ones. Here’s how.
Trending Stocks
Assume that the stock market is having a good day. Prices of the majority of stocks are on the rise. You decide that ABC Ltd shares are positively correlated to the market. This means they tend to rise when the stock market is up and fall when it is down. You buy the stock early in the morning and then sell it at a higher rate later that day to make a profit. If you’re able to identify other stocks that have a similar pattern, such as ABC, then you can use the same strategy in order to benefit from the overall rise in price.
Consolidating Stocks
Imagine that you’ve been tracking the price of ABC stock for some time. You’ve identified some support and resistance levels where the stock has been consolidating for some time. You could short ABC at the resistance level and then square off your position when ABC hits the support level. You can do this several times throughout the day to make a nice profit, even though ABC’s price hasn’t changed much.
Intraday Trading Indicators
In an earlier chapter, we talked about various indicators that can be useful when trading. Here are some of the most common indicators that you can use for intraday trading.
Bollinger Bands:
Bollinger bands are used to identify overbought or oversold situations. Traders use them to determine entry and exit points in a market that is range-bound or consolidating. It is best to buy when the price reaches the lower band and sell when it reaches the upper band. Bollinger Bands are explained in detail in Chapter 8.6: What they are and how to use them.
MACD:
Moving Average Convergence Divergence is a momentum indicator that follows trends. They use the relationship between moving averages to determine entry and exit points in a trending market. More information about these indicators can be found in Chapter 8.7: Use of Moving Average Convergence Divergence in Technical Analysis.
RSI:
The relative Strength Index is a momentum index that is used to identify zones of overbought or oversold conditions. The stock is overvalued when the RSI exceeds 70. Readings below 30 indicate that the stock is undervalued. The RSI works both in trending markets and consolidating ones. More information about them can be found in Chapter 8.5 – Relative strength index (RSI): What it is and how to apply it in technical analysis.
Intraday Trading: Advantages
- Margin allows you to invest more than otherwise possible
- Short trades allow you to sell securities first and then buy them back later.
- You will not be exposed to any overnight risks as you can square off your position in one session.
Intraday trading: Disadvantages
- Risky as positions need to be squared within the same session
- To be consistently profitable, you must master the art of technical analysis.
- Orders placed overnight for buy or sell will be reflected in the prices at market opening if there are any major overnight news stories.