Intraday trading is a popular strategy among traders in the Indian stock market due to its potential for quick returns. However, many traders face challenges and often incur losses, underscoring the importance of understanding and applying effective intraday trading tips.
This blog aims to provide you with key insights to improve your intraday trading performance. Whether you're looking to refine your current approach or gain a competitive edge, these tips will prove invaluable. Read on to discover how to master the art of intraday trading with confidence and precision.
Intraday trading involves buying and selling stocks within the same trading day. The goal is to capitalise on small price movements, making multiple trades to generate profits from the market’s fluctuations. Unlike delivery-based trading, where stocks are bought and held for a longer period (days, weeks, or even years), intraday trades are closed before the market closes, ensuring that no positions are carried over to the next day.
Imagine you buy 100 shares of a company at ₹500 each at 10:00 AM. Throughout the day, the stock price rises to ₹520. You decide to sell all your shares at this price at 2:00 PM. Your profit from this intraday trade would be:
Profit = (520−500)×100 = ₹2000
In this scenario, you capitalised on the price movement within the same day and exited the position before the market closed.
One of the significant advantages of intraday trading is the lower capital requirement due to the use of margin trading. Here's how it works:
1. Leverage: Brokers such as Sharekhan offer leverage, which allows you to control a larger position with a relatively small amount of capital. For instance, with a 5:1 leverage, you can buy stocks worth ₹100,000 with just ₹20,000 in your account. This leverage amplifies your potential returns but also increases your risk.
2. Churning capital: Intraday trading allows for quicker churning of capital. Since trades are closed within the same day, the capital is not locked up for long periods. This means you can use the same capital multiple times a day to enter and exit different trades, potentially increasing your overall returns.
3. Lower brokerage fees: Generally, brokerage fees for intraday trades are lower compared to delivery trades. For example, with Sharekhan, equity intraday brokerage is as low as 0.02% on the market rate or a minimum of 1 paisa per share on each side of the trade. In contrast, equity delivery brokerage could be around 0.3% for buying and holding shares beyond the purchase date.
Imagine you are trading shares of Reliance Industries, a highly liquid stock. You can buy and sell large quantities without significantly affecting the stock price. This allows you to make quick profits from small price movements. Liquidity is crucial because:
- Quick entry and exit: High liquidity allows you to enter and exit trades quickly, ensuring that you can capitalise on price movements as they happen.
- Tight spreads: If the bid price of a stock is ₹500 and the ask price is ₹501, the spread is ₹1. In a liquid market, this spread might be only a few paise, saving you money on each trade.
- Reduced slippage: In a highly liquid stock like HDFC Bank, if you place an order to buy at ₹1,000, you are more likely to get filled at ₹1,000 rather than a higher unexpected price, ensuring better control over your trade outcomes.
Suppose you buy shares of Infosys at ₹1,500, anticipating a rise. You set a stop loss at ₹1,470 to limit your loss to ₹30 per share. If the stock drops to ₹1,470, your position is automatically sold, preventing further loss. Here’s why using stop loss orders is essential:
- Risk management: Setting a stop loss helps you limit potential losses by automatically selling a stock when it reaches a predefined price.
- Emotional control: Without a stop loss, you might hold onto a stock that keeps falling, hoping it will rebound. With a stop loss in place, you avoid the stress and potential larger losses from such scenarios.
- Strategic placement: For a stock like Tata Motors, if it usually moves 2% up or down in a day, setting a stop loss at 3% gives it room to move without prematurely closing your position.
It is best to consider trading less volatile stocks like Infosys instead of a highly volatile stock like a small biotech firm. Here’s why avoiding overly volatile stocks is advisable:
- Unpredictable movements: Highly volatile stocks can experience rapid and unpredictable price swings. This makes it difficult to anticipate market direction.
- Higher risk: Trading volatile stocks like some penny stocks might seem appealing for quick gains, but the high risk of unpredictable swings can lead to substantial losses if the market moves against you.
- Stress and monitoring: Trading less volatile stocks allows you to make more calculated decisions without the constant need to monitor every price movement.
If you observe that HDFC Bank and ICICI Bank stocks often move together, you can buy HDFC Bank and short ICICI Bank to hedge your risk while potentially benefiting from their movements. Understanding stock correlations can be beneficial:
- Hedging strategies: By trading correlated stocks, you can balance your risk.
- Predictive trading: If you notice that Reliance Industries is moving up, and it’s correlated with the Nifty 50 index, you can predict that the index might also rise, allowing you to trade accordingly.
- Diversification: By trading correlated stocks like HDFC and SBI, you can diversify your portfolio within the banking sector, balancing your trades and reducing risk.
If you know that a major earnings report for Tata Motors is being released, you can prepare to trade the stock based on the outcome of the report. Stocks that react to news events can provide excellent trading opportunities:
- Stay informed: Keeping up with the latest news, earnings reports, and economic indicators that can affect stock prices is crucial.
- Quick reactions: Positive earnings news can lead to a price surge, while negative news can result in a price drop. A quick reaction to such news can allow you to enter or exit trades profitably.
- Understand the impact: A government policy change affecting the automotive sector can have a significant impact on stocks like Maruti Suzuki. However, minor news might not move the stock much.
Intraday trading is not a guaranteed way to make profits. It requires a well-thought-out strategy, risk management, and constant learning. Beginners should start small, using intraday trading tips from experienced traders, and gradually increase their exposure as they gain confidence and experience.
Effective intraday trading requires a blend of knowledge, strategy, and discipline. By choosing liquid shares, utilising stop loss orders, avoiding overly volatile stocks, understanding correlated stocks, and staying informed about news-sensitive stocks, you can significantly enhance your trading performance.
To deepen your understanding and stay updated with the latest trading strategies and market insights, visit the Sharekhan Knowledge Centre.
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