Intraday Trading Tips: Understanding the Basics

Intraday Trading TipsIntraday trading is the practice of purchasing and selling financial securities in a single trading day.  Traders involved in this practice are referred to as “day traders”. This trade is especially critical to traders who are looking to make quick gains in a single trading day.

Securities traded here are basically ones that trade regularly during normal business hours such as stocks and their options, currencies and futures like interest rate futures, commodity futures among others; not securities such as mutual funds that have to be purchased from dealers.  Though experience is important, learning about currency trading and stock trading is very critical for a beginner to succeed in this niche.

The Changing Phase of Intraday Trading

The practice used to be only a domain of financial companies and professional investors as well as speculators. Still, up to this day, majority of intraday traders are banks and investment firms whose employees are professional investors in the fields of fund management and equity investment.

The tide is however changing with a number of casual or rather common traders joining the field. This has been mostly enhanced by technology which has made trading easier; one can trade from the comfort of their offices or homes via the internet. Moreover, most governments have put in place legislations to ease the trade.

Rewards at High Risks          

Intraday trading can be a goldmine but it comes with high risks. Just as you can make money fast, you can lose it as quick. It is not about luck and hope; it is not even an art. This is a science which demands use of the right tools with strict adherence to rules.

Strategies to Succeed

Different traders have different approaches. A trade may last only seconds or a few minutes. While some traders concentrate on momentum or trends, others focus on very short trading. At the end of the day, many traders ensure they have closed their positions and wait for the next day. Following is a brief explanation for some of the strategies;

1. Daily Pivots

This strategy is only used for stocks that exhibit constant volatility. A trader attempts to buy when the stock price is low for the day and sell when it is at its peak for the day

2. Momentum

Traders who adopt this strategy look out for new releases or strong trending moves which have large volumes. A momentum trader will buy upon news release and wait until the trend starts showing reverse signs.

3. Scalping

This strategy calls for a trader to sell immediately a security becomes profitable. The price target is set at just above the profitability level.

4. Predetermined Exit Strategy/Stop Losses Strategy

Though this is not gambling, the words of the “Gambler” song by Kenny Rogers make a lot of sense in this trade; “one has to know when to hold on and when to walk away”. An exit strategy should be always ready such that you know the point to exit when things go wrong and when they are going right as well, it helps one stop losses. Further, this strategy will help you avoid a situation where you make a couple of little gains only to have a single large loss wipe all your profits.

5. Position Sizing

Taking into account a trader’s appetite for risk, position size should be based on a percentage of his/her total investments. In this kind of trading it is recommended to spread risk among different securities rather than putting all your eggs in a single basket. If disaster strikes in one security you can recover from those which have gained.

To Do

1. Paper Trading

Paper trading is basically a practice trading with real market factors. For beginners, it is important to practice first, if you make paper profits then you are sure to make real profits in the market, but if you don’t then you need to train further, otherwise you will end up in deep losses.

2. Effective Research

Observations indicate that day traders rarely do research if any; they just toss themselves in the market with the hope of making quick bucks. Research is the backbone of successful traders and business people.  A trader should identify sectors that he/she is interested in and then carry out an extensive research. One can even create a list of stocks to watch over a certain period of time. The stocks should be analyzed daily to establish their volatility on daily basis, their trend over time as well as volumes involved. Another key area for conducting research is the holding companies to know when they release their financial reports and how the market reacts upon release of such information.

3. Trade in Liquid Stocks

It is advisable to put money in very liquid stocks i.e. stocks that have very high volumes. With these stocks, entry and exit is very fast.

4. Understand Your Sectors

All stocks belong to certain sectors. Understanding a stock’s sector will help one take advantage of the sectors strength when deciding what and what not to buy. The sector trend is likely to indicate the direction the stocks a trader intends to buy will take. It is advisable to keep a tab of a number of sectors.

5. Trade in Stocks that are Correlated to Major Indices

Experts’ advice that traders select securities that are correlated to top indices and sectors such that when the indices or sectors exhibit an upward trend, the stocks in that sector or index rise as well and vice versa.

6. Use Market Internals to Gauge Strength and Direction

Market internals are very important in predicting intraday market direction. Specifically, use Market breadth which is the amount flowing in to up stocks less amount flowing to down stocks. Also there is the Advance Decline Line which is a result of subtracting number of down ticking stocks from the up ticking ones.

Another internal to use is the Arms Index which is done by deriving a fraction out of the Market breath and Advance decline line and finally computing them into a single figure. Put up charts of these three indicators and compare them with market charts and observe how the market reacts to changes in the internals. However, having prior knowledge of technical analysis can help an aspiring trader to instinctively guess the direction of the intraday market.

7. Be Creative

Many retail intraday traders have no clue on how to maneuver through the market and often end up making losses. One needs to analyze their tactics and learn why they lead them to failure. From that understanding one can come up with different strategies which will raise chances of success. Think outside the box.

Pitfalls to Watch in Intraday Trading

1. Overtrading

Each trade you make whether it results in a gain or loss attracts a commission. If you make many trades the more commission you will pay. If the gains were little and unfortunately you make a huge loss in one stock all the gains could be wiped away in an instant.

2. Keep off from Unpredictable Stocks

It is not advisable to trade in stocks with low average daily volumes. As well, where there is huge news looming on a certain stock, keep off completely if you are an intraday trader. The news may be good or bad thus leading to chaotic trading and panic selling if the news is extremely bad. Average stocks with average volumes should also be a no go zone if you are an intraday trader. Nonetheless, learning how to spot growth stocks is a desirable trait of a successful trader.

Conclusion

Intraday trading is not a walk in the park. Many people have tried and failed, ending up suffering huge losses. As earlier stated, it is a science which is mastered over time. One has to be patient enough to learn and study the market before starting the actual trading. It also requires commitment and dedication.