Intraday trading explained: Strategies, risks and considerations

The financial markets offer investors the opportunity to potentially build wealth over time. However, seasoned investors with a very high risk appetite may also sometimes look at the stock market as a route to make quick gains. This involves attempting to leverage daily price fluctuations in pursuit of immediate profits.

This is where intraday trading comes in. Intraday traders typically buy and sell stocks on the same day, aiming to profit from short-term price movements. However, despite the potential for quick earnings, lack of proper knowledge and improper market timing can lead to substantial losses. This article tells you more about intraday trading, its strategies, and the significant risks involved.

• Table of contents

• Intraday trading: Meaning
• What are the types of intraday trading?
• How to do intraday trading
• How is intraday trading different from regular trading?
• Advantages and disadvantages of intraday trading
• Tips to follow for intraday trading
• Mutual funds and intraday trading

Intraday trading: Meaning

Intraday trading refers to buying and selling financial instruments—be it stocks, commodities, or currencies—within a single trading day. Essentially, no open positions are carried over to the following day. Traders may use technical analysis, market trends, strategy, and real-time news to make quick decisions. The key driver is capturing smaller profits multiple times a day rather than waiting for bigger moves in the long run.

Key characteristics

• Short-term focus: Positions typically last from a few minutes to several hours.
• Leverage usage: Many brokers offer margin or leverage to magnify potential returns. This also heightens risks.
• Strict discipline: Successful intraday traders rely heavily on risk management, stop-loss orders, and emotional control.

What are the types of intraday trading?

Intraday trading strategies aren’t one-size-fits-all. Different approaches cater to various time horizons, risk appetites, and market dynamics. Below are a few notable types:

• Scalping
  • Traders enter and exit positions within a very short time frame – sometimes even seconds or minutes – aiming for potential small profits on each trade.
  • Requires lightning-fast decision-making and a robust technology setup.
• Momentum trading
  • Focus on stocks or securities that show strong price trends on a given day.
  • The idea is to ride the wave of market sentiment, capturing significant moves before they fizzle out.
• Breakout trading
  • Involves identifying price ranges and buying or selling when the price “breaks out” of these established support or resistance levels.
  • Stop-losses are set just below the breakout level to contain losses if the move fails.
• Reversal (counter-trend) trading
  • A strategy is where traders take positions against the prevailing trend
  • Higher risk, as countering the existing trend demands precise timing.

How to do intraday trading

• Choose a brokerage platform: Opt for a broker offering real-time market data, low commissions, and user-friendly tools.
• Set up your trading strategy: Decide whether you’re scalping, momentum trading, or following another approach.
• Determine your time window: Although intraday trades can occur throughout market hours, many traders consider the first and last hours as prime intraday trading time due to higher liquidity and volatility.
• Establish entry and exit points: Use technical indicators such as Moving Averages, Relative Strength Index (RSI), or Bollinger Bands to set clear buy/sell triggers.
• Place stop-loss orders: Stop-losses safeguard against unexpected market movements. They automatically close a position if the price hits a predefined threshold, limiting losses.
• Monitor market news and economic calendars: Intraday traders often react to breaking news or economic reports that can move markets instantly.

How is intraday trading different from regular trading?

It’s easy to confuse intraday activities with standard buy-and-hold transactions, but key distinctions exist:

Aspect	Intraday trading	Regular (Delivery) trading
Holding period	Positions are squared off within the same day	Securities can be held indefinitely
Main objective	Capitalise on daily price fluctuations	Aim for long-term capital appreciation or dividends
Risk & reward	Higher due to leverage and sudden market swings	Generally lower daily risk but may still face long-term market volatility
Leverage	Often used to amplify potential gains (and losses)	Usually not used, or used minimally
Impact of overnight news	No direct impact since positions are closed before the day ends	Can affect holdings significantly if negative news emerges after market close

Advantages and disadvantages of intraday trading

Pros

• Chance for quick gains: Traders can quickly see realised gains if their trades pan out as intended.
• No overnight risk: Because all positions close within the day, unexpected overnight news or earnings announcements won’t catch you off guard.
• Leverage opportunities: Brokerage firms often allow margin, enabling more market exposure with less capital.

Cons

• Emotional stress: Rapid price changes require constant monitoring, which can be draining.
• High volatility risk: Quick market swings can lead to big losses.
• Brokerage and fees: Frequent transactions can rack up substantial commissions if you’re not careful.
• Significant market knowledge needed: Such strategies are better left to investment experts.

Associated risks

• Market volatility: Price movements can be abrupt, leading to potential losses if stop-loss orders fail to execute effectively.
• Leverage risk: Using margin means you can lose more than your initial capital if the market moves sharply against you.
• Emotional biases: Fear and greed can derail disciplined strategies.

Tips to follow for intraday trading

If intraday sparks your interest, these guidelines can steer you in the right direction:

• Cultivate a strategy: Experiment with different strategies—scalping, momentum, breakouts—to see which fits your style.
• Start small: Especially when you’re new, limit your position size. Gradually scale up after gaining confidence.
• Use stop-losses: Always place a stop-loss to cap potential damage if trades go south.
• Stay updated: Keep an eye on business news, economic indicators, and major global events that could shake markets.
• Document and review: Maintain a trading journal. Regularly reviewing your successes and failures refines your approach.

Mutual funds and intraday trading

Mutual funds and intraday trading are two distinct approaches to investing in the stock market. Mutual funds are a long-term investment vehicle where money is pooled from multiple investors and managed by professionals to invest in diversified assets like stocks, bonds, or commodities. They are not oriented towards facilitating quick gains – instead, the suitable for those seeking the potential to build wealth in the long term while mitigating risk through diversification and expert management. Among mutual funds, Exchange Traded Funds are traded on the stock exchange and investors can choose to execute some intraday strategies. But such techniques are highly risky and are generally not recommended if you do not have the required knowledge or expertise.

Conclusion

Intraday trading can be suitable for those who seek to monitor real-time market action. Yet, it also carries significantly higher risks and demands disciplined strategies, robust risk management, and emotional composure. Thus, such an approach is more suitable for investment experts and highly seasoned investors with an extremely high risk appetite. For those looking to potentially build wealth over time, buy and hold strategies in the stock market or through mutual funds may be more suitable and less risky.

FAQs:

How does intraday trading work?

Intraday trading involves buying and selling shares on the same day. Traders closely watch technical charts, news, and market sentiments to pick quick, profitable trades. By the end of market hours, all positions must be closed.

What is the best time for intraday trading?

Many traders may favour the first and last trading hours for higher volatility and liquidity. However, some prefer the calmer midday period for more predictable price actions.

What are some intraday trading tips?

Tips include starting small, focusing on liquid stocks, placing stop-loss orders, and avoiding hasty decisions driven by emotions. Building and adhering to a solid trading plan is essential.

How to pick stocks for day trading?

Look for shares with high trading volumes and price volatility. Also, pay attention to corporate announcements or events. Stocks with consistent price movement and ample liquidity are ideal intraday candidates.

How is regular trading different from intraday trading?

Regular (delivery) trading means you can hold a position indefinitely. Intraday traders, on the other hand, square off all positions before the day’s end, focusing exclusively on short-term price movements.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.