There is a method in the chaos of intraday trading with careful strategies and rules
Retail investors while investing fundamentally have reservations against looking at price charts from a technical analysis standpoint.
What to use is a function of what is your mandate: For professional Fund Managers working for Asset Management Companies (AMCs), the mandate is outperforming their respective indices whereas if you run Multicap advisory, Portfolio Management Service (PMS), or manage your own money, the endgame is to furnish absolute returns.
To show absolute returns year after year there are many things that should work out for you. Historical charts showing CAGR returns beyond a 3-year period are rightly labeled as ‘For Educational Purpose Only’ because neither you nor your clients would be happy to see underperformance (negative portfolio returns) beyond a couple of years.
The practice drawing the most flak is intraday trading and retail investors are often encouraged to look elsewhere (such as pooled investment funds) for earnings growth and multiplying wealth. But it would go a long way if we know what is it that we are avoiding then again, blindly following popular advice. Intraday trading in India or day trading is not a taboo but is a strategy that needs to be dealt with with the utmost care.
Intraday trading or day trading can be defined as buying or selling financial securities in a short time frame to make profits from the securities’ price movements.
Intraday trading requires two parties for a trade, one to sell and the other to buy the security. Order books are maintained to align buyers and sellers. At present, trades come down to a matter of seconds.
The approach which is often advised for retail investors is holding securities with sound fundamentals for a long duration, as opposed to intraday trading. We will call this investing in the markets, to distinguish it from intraday trading.
Usually, individuals who invest in the market, either on their own or through an advisor, have another full-time job or another source of income to fund their investments. Whereas intraday trading requires more attention and nearly the whole trading day of an individual. The latter are often day traders and intraday trading is their main source of income.
For intraday trading, we have to first open a demat account with a broker. If we open our trading and demat account with online or discount brokers, we could benefit from their lower-than-average brokerage fees, unlike those of full-time brokers.
Ideally, an investor should also have a trading IT system in place, with charting platforms that provide live data feeds for a real-time picture of the markets.
Finally, intraday tip, to trade well, we should understand how to use the broker trading terminal to place our intraday trading orders.
The risks are generally higher in intraday trading than in regular trading.
The key difference between investors and day traders is that investors allow their assets to grow and accumulate wealth, whereas day traders need to withdraw their earnings on a monthly, weekly, or even daily basis in order to get by. For most day traders, trading is their primary, full-time occupation.
Hence, intraday trading today can be tricky for retail investors as they will be going up against the most seasoned traders, who may be the other party for their daily trade.
Such traders, many of whom are employed by investment banks or trading houses, have access to such state-of-the-art analytic tools, deep pockets, and a vast wealth of research that a regular individual investor will be hard-pressed to match.
Can we make money in intraday trading? Yes, of course. Traders earn their bread and butter with intraday trading. But the odds are often stacked against the average trader. Compared to intraday trading, there are other financial strategies and instruments that are less mercurial for the risk-averse. The burden of timing the market, constant technical analysis, and unavoidable losses don’t need to be borne if one does not wish to.
Intraday trading is a rigorous exercise that requires considerable time and resources of the trader for performing various tasks, ranging from researching and reading the market to executing the trades with the broker.
There are some trade rules which most day traders adhere to because they act as guidelines and may be regarded as intraday trading tips. They are:-
Day traders do not spend their energy analyzing all the stocks (or other securities such as commodities) on the exchange. Rather, they focus on selected stocks or securities in which to trade. The criteria for filtering out stocks may be summarised as follows:-
· Volatility – Day traders would be more interested in the stocks which have the potential for sizeable price movements in a trading session. Traders use screeners to filter stocks for volatility.
· Research – Research is imperative for sharpening the intra-day strategy for traders. Not just the securities and their immediate environment but also macroeconomic events that affect financial markets are likely to be a vital part of such research. Historical trends as analyzed by technical analysis are another aspect of research useful for a day trader. The key tip for a day trader to do well is to try and anticipate scenarios that give rise to trading opportunities and arm themselves with strategies for those.
· Stocks in the news – Stocks that are in the news are often preferred because news about them could potentially change their demand and supply in the market, affecting price, and could potentially be used for sketching an intraday strategy.
Risk-return trade-off, an important metric for intraday trading, can be done with the help of the risk-reward ratio. The risk-reward ratio is the ratio that helps the trader measure the risk they are taking to earn the reward.
A risk-reward ratio of 1:2 will mean the trader is willing to risk Re 1 of investment to earn a return of Rs 2. Traders fix this ratio according to their style and often follow it with discipline.
Intraday traders should not trade without stop-loss and target orders (both for selling off the securities). In the absence of stop-loss orders, for example, traders may end up losing a sizeable portion of their capital.
With most brokers providing leverage five to 10 times the capital brought in by the trade, the onus on the day trader grows to keep an eye on the margin in which they are trading, so they don’t overstretch their resources.
Leverage acts as a double-edged sword, powerful if used judiciously, and dangerous if used indiscriminately. Only the most skilful and experienced traders should ramp up their trades on margin money.
Behavioural finance is not just for investors. Day traders should keep in mind the pitfalls of human psychology and behavioural anomalies too. Traders should avoid the behavioural biases that behavioural finance talks about.
The more disciplined an intraday trader wants to be, the more careful they have to be in letting their emotions get the better of them through a trading day. After all, in intraday trading today, trading decisions have to be taken in a matter of seconds, especially when algorithms are at work.
Intraday trading, in simple words, is buying today and selling today. Buying and selling have to occur within one trading session on the same day. For example, a trader buys a stock XYZ for Rs 100 at 9:25 AM and sells XYZ for Rs 102 at 12:45 PM. The intraday profit will be 2 per cent.
Intraday trading returns are typically maximized by using leverage. Leverage enables a trader to invest more than the available capital. However, trading with leverage is as risky as how lucrative it sounds.
For example, the trader buys XYZ for Rs 100. Of the sum invested, Rs 50 is the trader’s capital and Rs 50 is invested on margin. If the stock goes up to Rs 110, the trader earns a return of [(110/50)-1] *100 = 120 per cent. If the trader had invested Rs 100, the return would have been only 10 per cent.
Conversely, let’s assume that the stock loses all its value. The situation will end up being a nightmare for the trader. The trader will lose all the equity value as well as the loan amount, in addition to the cost of bearing interest on margin capital. However, if the trader’s position falls below the minimum maintenance margin, a margin call is initiated. The margin call puts the trader under the obligation to deposit more equity in the account to make up for the margin money lost. Margin calls are initiated well before the trader risks losing all the money.
Yes, intraday trading is profitable. The trader must develop a strategy, account for the possible downside, and stick to the plan. People lose money while intraday because of the following reasons:
Intraday trading can yield positive payoffs if the trader is vigilant and responsive to market events without biases.
Intraday trading is one of several types of trading strategies. The most common types of trading strategies are as follows:
Day trading and Scalping are both short-term trading techniques that do not require the delivery of shares. Both strategies exploit intraday price movements and make use of leverage.
Some of the commonly deployed intraday trading strategies are as follows:-
A crossover intraday trading strategy is when a trade is triggered when two similar, but not the same, market metric intersect.
A crossover strategy is better understood by looking at the two kinds of crossovers – price crossover, and moving average crossover.
A moving average crossover occurs when a short-term moving average of an asset crosses over a longer-term moving average.
For example, say the 5-day moving average of an asset runs below its 10-day counterpart (lower magnitude in price). If the price of the asset significantly increases, the 5-day moving average will rise. It may even intersect, cross, and rise above the 10-day moving average, making the crossover a bullish or golden one. Traders following this strategy will engage in trades at this event.
If over time, the same asset sees its price significantly decrease, the 5-day moving average falls and this time may intersect, cross and fall below the 10-day moving average, making it a bearish crossover and triggering trades.
A price crossover occurs when the price of an asset increases above (or decreases below) a moving average of that asset. For example, the price of an asset may be below its 5-day moving average, but if the price of the asset suddenly increases and exceeds the 5-day moving average, then it will be called a price crossover and it would trigger trades.
A moving average envelope is another intraday trading strategy that utilizes moving averages. It involves constructing a confidence interval (let’s say a 10-per cent confidence interval) for a medium-term moving average (let’s say a 25-day moving average) to identify support and resistance levels. If the price of the asset moves beyond the 10- percent confidence level, it signals the trader to engage in the appropriate trade.
For example, if the price of an asset moved below 5 percent of the 25-day moving average, it could signal that the price of the asset has broken support and experiencing a downward price trend. The trader would then act accordingly.
Bollinger bands are used to make moving average envelopes.
Above is an example of how Bollinger bands can be used for trading when the price hits the lower end of the band, the trader should go long on the asset and when the price hits the upper end of the band, the trader should go short on the asset.
Event-driven intraday trading strategies can be described as strategies that try to profit off events such as earnings announcements, natural disasters, or events of unusual nature.
Whenever such events occur in the marketplace, there is increased uncertainty, which in turn increases the volatility in the market.
A reversal intraday trading strategy tries to identify changes in the price and help traders take a bet on the same.
In the case of an upward price trend, the reversal would cause a break in the rise, after which the price moves downwards. Indicator tools, which help identify changes in the price direction, abound. A well-known indicator to identify reversals is the RSI (relative strength indicator).
The RSI determines if an asset is overbought or oversold. If the asset is overbought, the trend is going to reverse and the trader should take a short position. Vice versa for an oversold asset, the asset is oversold.
A trader can create their own trading strategy based on their ideology. With an understanding of how the markets work, traders may choose securities to fit in with their ideologies and principles. They may go with forex, equities or stocks, or derivatives. After choosing the market to trade in, they have to create their entry and exit points using filters.
Care should be taken to test their strategy on historical prices first, and if it reaps positive results, it can be deployed in live markets.
If we believe that negative news on Brexit drags down the Pound-sterling (GBP) and props up the Euro (euro), we should choose the market to fit trades that act on such global news — forex.
The trades to execute in such cases would be to go short on GBP and long on the euro whenever there is news on the stalling of Brexit.
The next step would be to test it against historical data and then deploy the strategy if it corroborates the hypothesis.
There are different operational timings for different securities markets. The table below shows the Indian intraday trading time limits of the markets:-
Intraday trading requires considerable time and effort. Ideally, a person who is starting out as a trader should practice on a demo account with mock money, before beginning to trade with real money.
Intraday trading also requires traders to have access to a sizeable amount of capital and is not a get-rich-quick path.
Intraday trading requires time and effort:
A trader can place intraday trades only during market hours. The trades can be placed with the brokerage firm by either calling the broker or logging into your trading account. The trading account should allow the trader to trade in the desired asset, such as currency or commodities.
Intraday trades for equity are similar to placing a normal buy order. The only difference is that the trader has to select the option for day trading and untick delivery. The trader can also enter multiple options of stop loss and advanced trading instructions while placing the order.
No. Intraday trading is only limited to the extent of the capital that the trader can commit. The trader can execute any number of trades on the exchange.
However, the limit exists on the side of the broker. If the trader decides to use leverage for trading, the brokers generally outline the margin limits. For example, a brokerage firm may allow a trader to trade no more than 20 times the funds available in the trader’s account. Even in that case, the trader can always infuse more capital to be able to trade more.
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