Intraday Trading Strategies - Get Maximum Benefits from Intraday Trading

It’s quite difficult not to get tempted by intraday trading. After all, that is how you can make money from the stock markets without a long-term commitment.

A trader is a keen observer who doesn’t let emotions come their way. So, it’s important that you do research well and keep a tab on your emotions. All you need to do is exercise timely restraint. Intraday trading is also a double-edged sword where a single false step can cost you dear. There is no sure shot recipe for success in intraday trading. However, a good intraday trading formula and strategy can come in handy for most dealings.

Things to be Aware of Before Engaging in Intraday Trading

Before diving headfirst into intraday trading, it is critical to be aware of a few considerations.

• High risk and volatility: Intraday trading involves rapid price movements. Small news events or market reactions can significantly affect stock prices within minutes.
  
• Requires constant monitoring: You need to track stock prices, charts and market movements in real-time. If you are a passive investor, intraday trading may not be for you.
  
• Brokerage and taxes: Frequent buying and selling can lead to high brokerage fees, transaction costs and taxes, which reduce net gains.
  
• Strict time discipline: All positions must be squared off by the end of the trading day as holding positions overnight could lead to unexpected risks and losses.
  
• Leverage can be a double-edged sword: Many brokers offer margin or leverage for intraday trades, thus amplifying both potential profits and losses.
  
• Technical knowledge is important: A good understanding of technical indicators, candlestick patterns and price action is essential for making informed decisions.
  
• Risk of emotional trading: Fear, greed and impatience can lead to impulsive decisions. As mentioned previously, emotional control and discipline are critical for success.
  
• Not suitable for long-term goals: Intraday trading is a short-term strategy; therefore, it does not help in wealth creation or compounding over time.
  

Intraday Trading Guidelines

• Candlestick Knowhow
  

Candlestick charts originated in Japan way back in the 1700s. A candlestick, represented in red and green, shows the market’s open, high, low and close prices throughout the day.

Suppose the wide part of the candle is filled with green. It means that the open was higher than close. But if open to close was low, the candlestick will be represented in red.

Above and below the real body of the candle are ‘wicks’ or shadows. These represent the highs and lows of a day’s trading. Assume, for instance, that the upper wick of a red candle is short. It means the open price is close to the day’s high.

Similarly, a short upper wick of a green candle signifies that the day’s close is near the high. In short, a down candle is shaded red and an up candle is shaded green.

• Intraday Trading Formulae:

Pivot point theory: This is an effective intraday trading formula. It anticipates the movement of a stock based on its performance on the previous day. A rundown of the previous day’s trading data of a stock will give you inputs like intraday high (H), intraday low (L), and closing price (C). You need to add them up as: H + L + C = X Now, the derived value must be divided by 3: X/3 = P (which is called the pivot point) Then, multiply P with 2: X/3 X 2 = Y It is assumed that a stock moving above the pivot point is likely to continue its journey till the first resistance level. In some cases, it will move to the next resistance level.

Likewise, a stock trading below the pivot point is likely to drift lower to the first support level and continue to the second support level.

• First resistance level (R1) = Y – L

• Second resistance level (R2) = P + (H – L) Similarly, you can also calculate the support levels as:

• First support level (S1) = Y – H

• Second support level (S2) = P – (H – L)

Fraction theory: Just like the pivot point theory, it’s also a popular intraday trading formula that relies on inputs collected from the previous trading day. The previous day’s high (H), low (L), and closing (C) need to be added up and multiplied by 0.67 as:

• (H + L + C) x 0.67 = Y

The resistance and support is calculated in the same manner as in the pivot point theory. The stock’s possible buy (PB) is determined as Y – C. You can pick up the stock above PB and look for the resistance level.

• Theory of Intraday Trading:

Intraday trading strategies rely on inputs from the previous day as well as the current trading session. The previous day’s highs and lows of the stock should be tallied with the current day’s high and low. This tally should take place at 10.15 am after the markets open.

You can trade for a gain of up to 0.5%, and the stop loss is set at 1% lower. In short, the risk in this type of trading is twice the probability of earning any profit.

The problem with intraday trading strategies is that very few stocks will fetch profits for you. Only about three to four stocks, out of 100, will follow the above theory in day trading.

Popular Intraday Trading Strategies

Intraday trading involves buying and selling financial instruments within the same trading day, requiring effective strategies to capitalise on short-term price movements. Here are some popular intraday trading strategies.

1. Scalping: Scalping focuses on making multiple small profits throughout the day by exploiting minor price changes. Traders enter and exit positions quickly, often within minutes or seconds, aiming to accumulate small gains that add up over time.
   

2. Momentum trading: Momentum trading involves identifying stocks showing strong price movement in a particular direction due to news, earnings, or market trends. Traders ride the momentum until signs of reversal appear and then exit the position.
   

3. Breakout trading: This strategy involves trading stocks that break through predefined support or resistance levels. A breakout above resistance signals a buying opportunity, while a breakdown below support indicates a selling opportunity. High trading volumes usually confirm the breakout.
   

4. Reversal trading: Reversal trading focuses on identifying potential turning points in a stock's price trend. Traders look for oversold or overbought conditions using indicators like RSI or Bollinger Bands to predict reversals and take positions accordingly.
   

5. Gap-up or gap-down strategy: This strategy involves trading stocks that open significantly higher (gap-up) or lower (gap-down) than their previous day’s close, often due to overnight news or global market cues. Traders capitalise on the price movement during the day.
   

Risk Management in Intraday Trading

Risk management is crucial in intraday trading to protect traders from significant losses while navigating the volatile nature of the market. One key practice is setting a stop-loss, which automatically exits a trade if the stock moves against the trader beyond a predetermined price. As a trader, it is advisable for you to use only a small portion of their capital for each trade, typically 1-2%, to prevent overexposure. Diversifying trades across different stocks or sectors further helps minimise risk.

Using proper leverage is another critical aspect, as excessive leverage can amplify losses. You should avoid emotional decisions and stick to your trading plan, focusing on disciplined execution. Monitoring market trends, news, and technical indicators ensures informed decision-making. Additionally, maintaining a favourable risk-reward ratio, such as 1:2, ensures potential profits outweigh possible losses. Effective risk management not only protects capital but also builds long-term sustainability in intraday trading.

Intraday Trading Tips for Investors

To ensure you maximise profits when engaging in intraday trading, here are a few tips to consider:

• Set a stop-loss for every trade: As stated previously, it is quite critical to protect your capital by defining a maximum loss level before entering a trade. This prevents emotional decision-making and limits potential damage.
  
• Follow market trends, not gut feelings: Base your trades on clear price trends, volume data and technical indicators rather than speculation or emotion.
  
• Start with highly liquid stocks: Choose stocks that have high trading volumes and low bid-ask spreads. Large-cap stocks are often preferred for intraday trades due to better liquidity.
  
• Avoid trading at market open: Volatility is typically high during the first 15–30 minutes of market opening. Let the market stabilise before making a move.
  
• Use technical analysis: The importance of using technical analysis cannot be emphasised enough. Rely on charts, patterns and indicators like moving averages, RSI, MACD, and Bollinger Bands to time your entries and exits effectively.
  
• Don’t overtrade: Stick to a limited number of quality trades as overtrading increases costs and reduces focus.
  
• Stay updated with news: Be aware of corporate announcements, economic events or global cues that can trigger intraday volatility so that you can be better equipped when trading.
  

Conclusion

Intraday trading offers opportunities for quick profits but comes with significant risks due to market volatility. Success in intraday trading requires a disciplined approach, effective risk management, and a deep understanding of strategies like scalping, momentum trading, and breakouts. Setting stop-losses, maintaining a favourable risk-reward ratio, and avoiding emotional decisions are essential for protecting capital. While the potential for gains is high, as a trader, you must focus on consistent learning and risk control to achieve long-term sustainability in the dynamic world of intraday trading.

Read more: Intraday Trading Rules