The day traders make use of a high amount of leverage and deploy trading strategies to earn gains on tiny price movements seen in liquid stocks and currencies.
It is common to make money by stock and currency movements that happen as an immediate reaction to the news which include announcement of GDP numbers, change in interest rates by the Reserve Bank and quarterly or annual results by corporates. The markets react in wild swings when the news either falls short or exceeds the expectations of market participants.
Intraday trading is inherently risky. One needs to have an incisive understanding of markets and strategies to be able to earn money. Several experts claim that over a long term the gains made through day trading underperform the growth of index, especially after the fees and taxes are factored into.
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It is also believed that day trading is not meant for everyone and only those who understand the market quite well, witnessed its rise and fall from close quarters, and are acquainted with an array of trading strategies can make money in day trading.
It is vital for a day trader to be able to read charts and do technical analysis. Aside from this, the trader also must understand the market and the characteristics of assets
Intraday trading: tips, strategies and basics
Usually day traders trade in stocks which move a lot and that are highly liquid. This gives them an opportunity to change their position before the price moves further. If the price moves upward, the trader may buy the stock and if the price falls, the trader goes for a short sell. Irrespective of which technique the trader follows, they try to trade in stock that is liquid.
Also, the traders need to follow a discipline. An impulsive sale or purchase can cost dearly.
To be able to do day trading, a trader needs to have access to the following:
Multiple news sources: Multiple news sources offer numerous opportunities from which the day traders make money. It is vital to know when something happens. Usually, traders keep a tab on a popular newswire such as Dow Jones, and regular news coverage from news organisations and also the software that analyses the important news stories.
Analytical software: It is expensive but important for the day traders who rely on technical indicators.
Trading desk: A trading desk enables traders to execute trades instantly, an important phenomenon when sharp price movements occur. This is, thus, reserved for those who deal with a large amount of money and work for a large institution.
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Intraday day traders follow these intraday strategies
Range trading: This strategy primarily uses support and resistance levels to make buy and sell calls.
Scalping: This aims to make several small profits on small prices changes during the day
High-frequency trading (HFT): This strategy uses algorithms to make money by capitalising on small market inefficiencies.
News-based trading: This strategy particularly seizes trading opportunities from the increased volatility around the significant news events.
Intraday trading guide for beginners
To be able to carry out intraday trading, one must have a trading account and a Demat account. If you make investments, and now want to try your hand at intraday trading then you can open a separate account for this to avoid confusion over different sets of investments – long term and short term.
As a beginner, you must make sure to follow some of the important tips:
1. One cannot completely rely, but can certainly base their decisions, on some of the market trends and charts. It is advised to follow the charts for a few weeks before putting your money in the day trading.
2. Since charts and trends are of utmost importance, it is imperative to choose the broker who can help you with both research and technical analysis. But make sure that the broker does not charge a high commission because intraday trading involves too many transactions.
3. It is important to have stop losses. This will minimise your losses and hence it is important not to do intraday trading without stop losses.
4. Do intensive research and avoid the shares which swing far too wildly, or are too stable
5. Timing is of great significance. If the strategy is right but since you fail to take a position at the right time, you lose out on the possible gains.
READ MORE: All you need to know about Futures and Options trading
How to choose stocks for intraday trading?
At the outset, you should shortlist some stocks that can be monitored easily. Avoid making gains out of every possible stock movement. This can jeopardise your chances to make safe gains. As they say “If you chase two rabbits, you will not catch either one”.
Experts advise that day traders should select stocks that have sufficient liquidity, and at the same time – medium to high volatility, and that move with the index.
After reading charts and patterns, traders should be able to identify the right stocks and insulate them from the market noise and then buy and sell the stocks by capitalising on that trend.
A. Liquid stock: To be able to buy and sell the stock on the same day, the trader must trade the liquid stocks. Since intraday trading depends largely on exact timing and speed of executing the trade, it is vital for the stock to be liquid. Because of this, large cap stocks are preferred for intraday trading.
B. Good volatility: The volatility is very important. All the charts and patterns of index, sector, economy and company are analysed and act as precursor to the direction which the chosen stock will take. But if the stock is too stable then all the efforts to predict its movement would go down the drain.
C. Moves in tandem with the index: Generally, traders choose equities that move in the same direction as the sector or index. So when the index rises, the stock price also moves upward and when the index declines, the price also falls. This gains significance when the trader is trading in the strongest or the weakest stock of the index.
Intraday trading time analysis
A time frame is very important for an intraday trader to understand the trend and act on it. To predict the future movement of a stock, the traders rely on charts and patterns that depict their movement during the day. It is a truism in the intraday fraternity that ‘the trend is your friend’. But it is vital to act on the trend at the right time to make the most of it.
These stock movements vary from a few minutes to a few hours. Depending on the volatility and liquidity, the charts that are studied are of different time durations – five-minute charts, two-minute charts, 15-minute charts and hourly charts.
A day trader generally uses 15-minute and 60-minute charts to determine the primary trend and a five-minute chart to know the short-term trend.
What time frame a trader relies on depends on how frequently they want to trade, and the volatility of stocks and sectors they trade in. However, after choosing the main time frame, they choose time frames both below and above it to add value to their analysis.
As a matter of principle, a short-term chart helps determine the entry and exit point, the intermediate chart gives the trading signal and the long-term chart underscores the overall trend.
The experts warn that an intraday trader must not get too carried away with a short-term trend. They are essentially used to confirm or repudiate a trend indicated by a primary chart.
Reflection: Intraday trading is meant for the traders who can trade on high leverage, take bigger risks and want immediate gains without getting tied up to a stock for long. Stocks react positively or negatively to the news relating to company, sector, economy and policy decisions taken by the government. The intraday traders take trading calls to make gains from the stock movements that follow the news of the day.
To predict these movements, traders keep a tab on the data announcements, subscribe to news wires and carry out technical analysis. It is vital for intraday traders to spot the short-term trends along with the long term to get a direction before taking a trading call.
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