What is Intraday Trading: Meaning, Strategies and Important Indicators to Note

Seeking an investment or trading avenue to make short-term gains? With decent market knowledge and risk appetite, you might want to take part in intraday trading. With intraday trading, you buy and sell stocks on the same trading day before the market closes. 

As a trader, if you want to get started with intraday or day trades, read through this blog, learn strategies, benefits and risks associated with intraday trading. 

Quick Synopsis

• Intraday trades allow you to make potentially quick profits within a single trading day.
• Trading in stocks with high volume and liquidity, and by considering price swing percentage, you can strategise your day trade.
• Also consider moving averages, Bollinger band, RSI, etc, to help you with intraday trades. 
• Beware of the volatility, and time constraints. Traders end up overtrading in intraday trading which may backfire.

What Does Intraday Trading Mean?

To make short-term gains, if you are looking for an answer to what is intraday trading, here is a detailed breakdown:

• You enter the market at 9:15 AM, open an intraday position and exit by 3:30 PM. 
• As stock prices move rapidly throughout a day, this brings you the potential to capitalise on short-term fluctuations in the share prices. 
• Suppose a stock opens at ₹100, rises to ₹106 within the same day. You buy at ₹102 and sell at ₹105 each. Thus, you capture a ₹3 per-share intraday gain from the price changes.
• You might also short-sell stocks in day trading. Here, you can borrow stocks expecting their prices to fall, which allows you to buy them back at a lower price to profit from the difference.
• Day traders or intraday traders rely on candlestick formations on trading charts and interpret a potential bullish or bearish movement of prices. It also helps make trading decisions along with other indicators. 
• However, note that you must close your intraday position before the market closes. Otherwise, your broker will auto-square off your position, and some might even charge an amount between ₹10 and ₹50 per executed trade with GST. 

How to Get Started With Intraday Trading?

When you are seeking an answer to how to do intraday trading, you must first open a Demat and a trading account to begin with. Once you have the accounts, you must have the following strategies in place to properly get started with day trading:

Pick Stocks With Higher Liquidity

Day trading relies on liquidity, as entering and exiting the market on the same day depends on it. You might find small and mid-cap stocks having the ease of buying and selling, but they are highly volatile. You can analyse its 52-week highs and lows as they typically provide insights into its price variation and help decide on opening a long or short position. 

Consider the Volatility

As you already know, stock prices are sensitive to market volatility, so you must consider the factor of price swings. Typically, it is wise to avoid stocks that have price swings of more than 3% while trading intraday. It is because the existing risks might substantially increase if stock prices or the market experience a sudden downturn. 

Higher Trade Volume

As a strategy, you must also consider the trade volume of stocks to locate potential profit-making opportunities. For example, a higher trading volume might indicate a strong demand or supply due to the company’s recent performance, whose share you own. Thus, trading volume might help to open a long position (buying) or a short position (selling). 

Important Indicators of Intraday Trading to Note

While implementing the aforesaid strategies, you must also look out for some important indicators while day trading:

Moving Averages

Typically, moving averages calculate average stock prices over periods such as 10, 50 or 200 days. Thus, it helps you to identify the direction of your chosen stocks or the market and helps filter out short-term volatility. 

Bollinger Band

It is a bit more complex indicator and needs a bit more expertise in day trading. It is made up of 3 lines, which are the upper limit, the lower limit and the moving average. Thus, it helps to understand the underlying stock price movements better than just a moving average. 

Relative Strength Index or RSI

It is another important indicator that represents the potential rate of price changes of stocks and is applicable for intraday trading. It ranges between 0 and 100 and is typically calculated over 14 days. An RSI reading below 30 signals potential buying opportunities, and over 70 indicates a selling opportunity. 

Benefits Associated With Intraday Trading

Before you go ahead and participate in intraday trades, you must have a look at their potential benefits and possibly realise them:

Quick profits and Liquidity

As intraday trading allows traders to capitalise on a stock’s price movement in the short term, it opens a possible window of opportunity to make quick gains in a single day. As the financial market is typically more liquid in trading hours, you can quickly enter and exit the market. 

Low Overnight Risks

As a day trader, you must close your intraday positions on the same day. Unlike delivery trades, you can avoid the potential overnight risks due to news, political concerns, etc, that might impact stock prices on the next day.

Associated Risks With Intraday Trading

Although there is short-term profit-making potential, intraday trades have the following risk: 

Volatility and Time Constraint

As the security market is volatile, there is always a chance of facing unexpected price swings during the day. As you must close your intraday positions on the same day, there is a limited amount of time to recover if your stock prices dip due to a price swing. 

Risk of Overtrading

The urge to recover from sudden losses might lead you to do overtrading. This increases exposure to more market risks without any guaranteed return. 

Tips to Trade Smartly in Intraday Trades

Here are some crucial tips that you must bear in mind alongside the day trading strategies:

• Always use a stop-loss as it helps cushion against losses to some extent.
• Your broker might impose a trade settlement charge between 0.03% to 0.05% on your transaction value. It increases your overall expenses. 
• Also, you must pay Income Tax on gains from day trades. Therefore, you must target a gain after excluding such extra expenses. 

Final Word

With intraday trading, you buy and sell stocks on the same trading day and book a potential short-term profit. However, it requires a proper strategy, indicators, chart patterns, etc, to locate potential entry and exit points in the market.