Intraday Trading for Beginners: A Complete Guide to Get Started

Intraday trading, also called day trading, is the buying and selling of stocks within the same day. In other words, intraday trading means all positions are squared off before the market closes, and there is no change in ownership of shares as a result of the trades.

Until recently, people perceived day trading to be the domain of financial firms and professional traders. But this has changed, thanks to the popularity of electronic trading and margin trading. Today, it’s very easy to start day trading. Let us explain how it works to help you get started.

How Does Intraday Trading Work?

In intraday trading, traders try to capitalise on short-term price fluctuations and generate profits based on market volatility. Intraday traders closely monitor price movements, utilise technical analysis tools, and employ strategies like scalping or momentum trading to execute quick trades and take advantage of intraday price swings. It requires careful risk management, market knowledge, and the ability to make swift decisions in a fast-paced trading environment.

Benefits of Intraday Trading

Intraday trading offers several benefits for traders:

1. Quick profits: Intraday trading allows traders to capitalise on short-term price movements, potentially generating quick profits within a single trading day.

2. Increased liquidity: Intraday trading provides numerous trading opportunities as financial markets tend to be more liquid during trading hours, allowing traders to easily enter and exit positions.

3. Flexibility: Intraday trading offers flexibility in terms of strategy and trading style. Traders can choose from a variety of techniques, such as scalping, momentum trading, or technical analysis-based approaches.

4. Lower overnight risks: By closing all positions before the market closes, intraday traders can mitigate the risks associated with overnight market events, such as company announcements or global news that could impact prices.

5. Learning opportunities: Intraday trading allows traders to gain practical experience and learn about market dynamics, technical analysis, and risk management strategies through real-time trading activities.

Risks of Intraday Trading

Though intraday trading has the potential to generate quick profits, it also entails a lot of risk that may result in major losses. Here are the risks of intraday trading:

1. High market volatility: Intraday traders are exposed to sudden and unpredictable price swings. Even small, unexpected market movements can trigger stop-loss orders or result in losses that quickly erode capital.
   

2. Leverage-related risks: Many intraday traders use leverage. Now, while this can magnify profits, it also increases loss. A minor negative movement in a leveraged position can erode the money of the trader.
   

3. Time constraints: All positions must be closed before the market closes, typically within a few hours. This short window leaves little time to recover from losses or for positions to turn profitable.
   

4. Liquidity risks: Trading in illiquid stocks can lead to difficulty entering or exiting positions at desired prices, thereby increasing the risk of losses.
   

5. Emotional and psychological risks: The pace and constant monitoring involved may cause emotional rather than rational decisions, including panic selling or over-trading to cut losses, which might cause financial losses.
   

6. Technical analysis limitations: Intraday trading is often based on technical analysis and historical price patterns. Markets, though, can behave unpredictably, and technical signals may fail, leading to losses.
   

7. Overtrading and high transaction costs: The temptation to recover losses or chase profits can lead to overtrading, resulting in higher transaction costs and increased exposure to risk without guaranteed returns.
   

8. Regulatory and operational risks: Intraday trading in certain instruments, such as zero-day-to-expiry options, introduces additional operational and margin risks, requiring strong monitoring and risk management systems.
   

How Is Intraday Trading Different from Regular Trading?

There's only one difference between a regular trade and an intraday trade. It lies in taking the delivery of the stocks. In intraday trading, you square off your positions on the same day. So, your sell order offsets your buy order. This way, there is no transfer of ownership of Sh3hares. A regular trade gets settled over a span of days, if not longer. So, you get delivery of the shares you bought while the shares you sold move out of your Demat account.

Intraday Trading vs Momentum Trading

Intraday trading is a short-term trading style where positions are opened and closed within the same trading session. The primary goal here is to profit from price movements that occur during the day, while avoiding overnight risk. This style of trading relies heavily on technical analysis, using real-time charts and indicators to spot short-term patterns.

Momentum trading, meanwhile, is a broader approach that involves buying securities that show an strong upward price movement and selling when the momentum fades. While momentum strategies can be applied on any time frame, be it daily, weekly, or intraday, they are not restricted to same-day trades. This style depends on identifying liquid, high-volume stocks and using momentum indicators such as the Relative Strength Index (RSI) and MACD to time entries and exits.

There also exists a hybrid strategy called intraday momentum trading wherein traders aim to ride strong price momentum within a single trading session, identifying stocks that show early signs of a trend and exiting before the market closes.

Intraday Trading vs Swing Trading

When it comes to intraday trading, the goal is to capitalise on small price movements throughout the day, with all positions closed before the market closes. This trading style, thus, demands high levels of focus, quick decision-making and the ability to manage multiple trades simultaneously. Intraday traders also often use high leverage, amplifying both potential gains and losses, making it a high-risk, high-reward approach suited for experienced and disciplined individuals.

Swing trading, on the other hand, is a medium-term trading strategy where positions are held for several days to a few weeks to capitalise on broader price trends and market swings. This, thus, allows for more in-depth analysis and generally combines technical indicators with occasional fundamental insights. It typically involves lower leverage and reduced trading frequency, which helps minimise transaction costs and the risk of rapid capital erosion. Swing trading is often seen as a balanced strategy that suits traders looking for a blend of structure, flexibility and time efficiency.

Basic Rules for Intraday Trading

Trading of any kind has its own set of rules. Here are the basic rules that every intraday trader needs to keep in mind.

• Do your research: Do a thorough research and analysis about the current market situation, learn the fundamentals of the companies being traded, and gain knowledge of macroeconomic details, such as the country’s debt status or currency movements.
  

• Invest an amount you're not afraid to lose: Intraday trading is high risk. It is advisable you only invest what you can afford to lose.
  

• Understanding entry, exit and stop price settings: Selecting the right value for entry and exit is crucial. This helps in setting an escape value for a crisis situation.
  

• Do not overtrade: The share market does not necessarily trend in a predictable manner. The optimal way to go about intraday trading is to trade only a handful of scrips at a time.
  

• Evaluate your performance: Intraday trading is dynamic. Keeping a track of your performance will help you understand what went right and what didn't. Evaluation of past performances will help you make better trading decisions in the future.
  

Who Should Participate in Intraday Trading?

Intraday trading promises high returns and thus may sound very attractive. But it also carries a higher risk compared to the delivery segment. So, if you have a day job that requires your full attention for most of the trading hours, you may want to avoid intraday trading. For one, you have to watch the market and time your trades to perfection. Secondly, you need a good understanding of and time to perform technical analysis on daily charts to make the right decisions.

Where to Place Intraday Trades?

You need to trade in the intraday segment using the right broker, one who offers you research support as well as technical support. Having the right tools is crucial to maximise intraday trades. Given the high frequency of transactions, it is important that you choose an account with low brokerage per transaction and speedy execution. One option you can consider for this is the Trade Free Plan option from Kotak Securities. It allows you to execute intraday trades at just ₹10 per order.

What Kind of Stocks Do You Choose for Intraday Trading?

In intraday trades, it is crucial for you to square off your position before the market closes as trades are not carried forward to the next day. This time-bound nature makes it essential for you to choose stocks that have enough liquidity for executing such trades – allowing you to enter and exit positions quickly without significant price impact. This is why many recommend high-liquid stocks like large-cap stocks, as they typically have higher trading volumes and narrower bid-ask spreads. This can also minimise the chances of your trades impacting the share price of the selected stock. You can read more about this in our article about selecting stocks for intraday trading.

When to Execute Intraday Trades?

Timing the market is crucial for intraday traders. Taking a position at the wrong time can be the difference between profits and losses. Many experts suggest that it may be better to avoid taking a position within the first hour of trading. This is because the market tends to be volatile during this period.

Why Should You Participate in Intraday Trading?

Some of the advantages of intraday trading are:

1. Higher margins available to traders compared to investors
   
2. High return potential
   
3. Lower brokerage charges
   
4. Short-to-medium horizon for strategies to pay off.
   

That said, do analyse if you are ready to witness high risk and are willing to put extra effort into analysing market behaviour daily.

What Are Intraday Trading Indicators?

Intraday trading indicators are tools used by traders to analyse price movements and identify potential trading opportunities within a single trading day. Traders often use a combination of trading indicators alongside other technical analysis tools to make informed trading decisions. Understanding how these indicators work and practising using them in conjunction with proper risk management techniques is essential to be successful in intraday trading.

What Is 'Value Area' and Why Does it Matter?

As an intraday trader, you want to pick the market direction early. The simplest way to do this is by identifying the 'value area' for the stocks you target to trade in. This can help you make a trade decision. Experts call this the 80% rule. Value area is the range of price where at least 70% of the previous day’s trade took place. Once you have identified this area, observe where the price opens for the day. The rule states that if the price starts below the range and stays there for the first hour, there is an 80% chance that it will rise into the area.

However, if it starts above the value area and stays there for the first hour, there is an equal chance that the price will fall into the area. Thus, if the stock starts above and stays there, you may want to take a short position near the top of the value area. Similarly, if the stock starts below the value area and stays there for an hour, you can take a long position near the bottom of the value area.

What Is the Brokerage Charge for Intraday Trading?

The brokerage charges for intraday trading in India vary among different brokerage firms. Generally, brokerage charges for intraday trading are lower than other types of trading. Some brokerage firms may offer fixed brokerage charges per trade, while others may have a tiered structure based on the trade value or turnover. It's important to compare brokerage charges among different firms and consider other factors such as trading platform, customer support, and additional services offered before choosing a brokerage firm for intraday trading

How to Get Started with Intraday Trading?

You can start by opening a trading and demat account. If you have been investing in the stock market, you may want to open a separate account for intraday trading.

You can then sign up for the right tools that help with intraday trading. It can also help manage your taxes, as intraday trades are treated differently per the Income Tax Act.

Once you have the requisite tools and accounts, you can begin by looking at daily charts to identify trends in price movement. For this, you may need the support of various technical analysis tools. You can get access to these tools on trading terminals TradeSmart.

When engaging in intraday trading, do remember the above-mentioned thumb rules to ensure that you are well-equipped to start your journey as a day trader.

Read more: What is Margin Funding in Trading