Intraday trading involves taking long or short positions in securities and squaring off the positions before the end of the trading day. The tools and techniques used for intraday trading are fundamentally different from those used for long-term investing.
Intraday trading requires two parties for a trade, one to sell and the other to buy the stocks. The market is very volatile, and profits do not depend only on the market going up. You can make a profit even when the market is moving downtrend. A day trader can make money irrespective of whether the market is going up or down. Therefore, identifying the right stocks for intraday trading involves isolating the current market trend from any surrounding noise and capitalizing on that trend. Intraday traders have to be quick on their moves and make sure that they do not flow with the moment and stick to the intraday trading rules. In this article, we will discuss some of the disciplines that a day trader should get used to before taking up intraday trading.
- Have a consistent trading plan: Having a plan is essential for achieving success in trading. A trader should have a trading plan as day trading is not a cakewalk. With a smart plan, one will have the guidance on when to take a trade, when to book profit, when to cut losses and where other opportunities could exist. A good trading plan can help a trader avoid making emotional decisions in the heat of the moment.
- Trade with money you can afford to lose: It’s vital to set aside a certain amount of money for day trading. But it is important for a trader to first focus on how much loss he is willing to take overall, and on a per trade basis.
- Follow strict stop loss: One of the biggest traits that set apart winning and losing traders is discipline. Make it a habit to use ‘stop-loss’. A stop loss order is an automatic order to buy or sell a stock when its price reaches a specified level. Remember, stop losses are required in most trades, but it is a must-have in intraday trading. In the absence of a stop loss, one may end up holding positions with unmanageable marked-to-market losses.
- Entry and exit strategies: Sometimes a trader might get fascinated by a particular stock, but we should not forget that one has rely on specific strategies to make a profit from it. One should stick to certain set guidelines religiously in intraday trading.
- Choose liquid stocks: Liquid stocks tend to have high volumes and this can allows for purchase or sale of larger quantities without significantly impacting the price. This can help grab any potential gain that may arise from large price movements on any given day. Since intraday trading strategies are dependent on speed and precise timing, a high degree of volume makes it easier to get into and out of a trade.
- Keep business and emotions separate: The intraday market is very volatile, and we may experience great profits or losses within a short span of time. Hence, it is important to have tight controls over one’s emotions. One should not get too excited by the profits he makes, and not get disheartened by losses. A day trader has to have a very alert mind to be able take quick decisions. For this, one has to have a mind free of emotions.
- Do not over trade: This is the golden rule of intraday trading. The share market may not always trend, or trend in a predictable manner. Trading only in a handful of stocks at a time is the best way to go about with your day trading. If we continue to ignore the market response, that can be a sure-shot recipe for losing your money.
- Choose businesses, not stocks: Simply trading in the most popular stocks may seem like the way to go, but it’s best to trade based on a company’s brand name rather than popular shares. It is always better to evaluate a company before you choose to trade its stares.
- Keep a tab on the news: A trader should keep strong vigil on news; otherwise she is likely to fail as an intraday trader. Intraday trading is not about punting on the market; it is a lot more organized way of doing things. By keeping tabs on news and on macros and evaluating the flow of corporate actions and announcements, a day trader can do much better.
- Record wins and losses: The stock market keeps changing, and your strategy should also change accordingly. To help one on this, a trader needs to record his trading wins and losses. This can be followed by a daily or weekly evaluation. This may sound pedestrian and clerical, but it is extremely important. This exercise may help one identify gaps in a strategy and adjust future trades with ease.
These rules are really important for intraday margin trading. It is essentially an activity that calls for discipline and risk management and can only be perfected over time. It would not be wrong if we say that intraday trading requires bringing a certain of uniformity to the trader’s lives.