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Before starting intraday trading, we must know its requirements. For intraday trading, you need to have a trading and a Demat account. Intraday trading is an intriguing way of trading. Like other trading styles, intraday trading also involves the buying and selling of stocks, but the rules for buying and selling securities are different. Measuring each day’s fluctuation of a stock price is not simple, and in the case of volatile stocks, prices are even tougher to track.
The definition of intraday trading is simple: it is trading within the same day before the market closes. These trades aim to invest in large volumes and gain profit on small movements, whether it is the movement of an index or a particular security. The most important thing to keep in mind is that intraday trading works until the end of the trading day. Neglecting your trades leads to brokers squaring off your trades and transferring all the holding into your Demat account.
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Definition of Intraday Trading
Intraday trading is a method of buying and selling financial assets in bulk quantity and squaring off the trade; the main goal of these trades is to make a profit by capitalising on small movements of the stock price before the end of the same trading day. If you forget to square off your trading position, then the broker has the right to square off your position. You can also refer to intraday trading as a day trade.
Intraday trading for beginners can be tricky. It works when a trader buys particular securities by specifying them for intraday. Suppose you forget to sell these stocks, then the trade will be converted into a delivery trade. In the event you place an intraday order, your broker will close your trading positions.
Intraday Trading Indicators
If you are a novice or an experienced trader, you may find it difficult to get a hold of different trading indicators. Intraday traders frequently use a trading indicator to trade in stock prices. As the trade is held for a short period, it is recommended to follow a mathematical or logical pattern in order to avoid any blind investments. Understanding this trading indicator is a good start to intraday trading. Some of the technical indicators are as follows:
Moving Average
The moving average is an indicator that is represented as a line on the charts, which shows the behaviour of stocks as a line on the charts. These indicators help in finding the entry and exit points of a stock over a specific period of time. As a trader, you can identify the minimum average line on the chart, which indicates the stock’s closing rate during that time interval. The moving average indicator helps traders indicate fluctuations in prices and determine stock trends.
You can also frame this indicator as the standard deviation of the stock, where it shows the upper limit and the lower limit of the stock price. These variations in the stock price occur over a particular time period, and one can invest by observing these patterns.
Momentum Oscillators
When the market is highly volatile, the momentum oscillators help a trader know whether a stock rises or falls over a given time period. It works on a scale of 1 to 100, which tells whether the stock price will rise or fall. That helps the trader identify the right time to buy a particular stock.
The Relative Strength Index (RSI) indicator is a momentum indicator, which is beneficial in technical analysis because it measures the extent of change over a period of time. It also ranges from 1 to 100, graphically representing when a particular stock is bought or sold at its highest. If the RSI is over 7, it is considered overbought, and if it is less than 30, you can consider it oversold.
RSI = [100/(Average gain / Average loss)]
Now, let’s look at the other aspects. One of the other primary questions regarding intraday trading is which stock one should select.
How to Select Securities for Intraday Trading?
You must know which securities you need to bet on, as selecting a stock that doesn’t have volatility can simultaneously harm your trade. Some of the things you must ensure before doing your intraday trading are as follows:
Liquidity of Stocks
Liquidity is an important aspect of intraday stock trading because it plays a significant role in converting your trade into profit. Equity shares of small and mid-cap companies cannot be easily traded and can experience a big difference in their prices. So, it would help if you also traded blue-chip stocks.
Volatility of Stocks
Consider good stocks which possess medium to high volatility in price fluctuations. In general, a market value fluctuation of more than 3% should be avoided while making an intraday trade.
Index Stock
It is best to choose a stock with a strong correlation to a benchmarked index of a well-known stock exchange. A substantial benchmark of the index is observed, and if you follow the following securities, you can track and benchmark indices and shares of top companies listed in the stock market. Following this rule, you can recognise the uptrend and downtrend of the following securities.
High Volume of Trade
Intraday traders often trade in a high volume. Suppose you identify trades with a higher trade volume index that reflects high demand and supply depending upon the underlying securities. You can then make a trade in the following securities. These securities can be from different industries or even different sectors.
Benefits of Intraday Trading
Here are some of the important advantages of intraday trading:
More Buying Power
Most traders accept intraday trading as a profitable form of trading. With intraday trading, you can also take leverage from your broker in order to make better returns. A stock broker can give up to 10x leverage for your trade. But to become eligible for these leverage funds, you need to open a margin account and add some funds or securities as collateral against the leverage.
Less Risk
The stock market constantly moves, which basically means securities prices are not constant, and there are chances of moving prices due to company financial results, business prospects, macroeconomic factors, etc. In contrast, negative political or environmental news emerges to affect the market during the next session. Intraday traders rarely concern themselves with these major factors as their trade depends on the volatility of minutes and microseconds.
Short Selling
An intraday trader can short-sell securities because they can buy or sell their position on that trade again based on the indicator that gives a buy or sell signal. This strategy helps them to capitalise on any bearish speculation on the stock.
Disadvantages of Intraday Trading
Some of the disadvantages of intraday trading are as follows:
Risky Affairs
Intraday trading is a meticulous task, where traders need to be careful about their actions. An intraday trader needs to be meticulous about the trade, observe every single movement, and accurately execute the trade.
Volatility
Observing a stock with 1-minute, 3-minute, or even 5-minute candlestick charts is quite tricky. When you observe a 15-minute or 30-minute candlestick chart, the stock price will appear more streamlined and predictable. It’s better for intraday traders to avoid sensible decisions and rely on indicators and trading strategies.
Conclusion
An online trading account is used for performing intraday trades, which also require a good grasp of technical knowledge and an understanding of the stock market. While making intraday trades, you need to square off your position before the end of the trading day, or these shares will be converted into delivery and transferred to your Demat account.