How to Trade Intra-Day Effectively

A successful self trader – Rule # 34

Intraday trading is all about closing both sides of the trade on the same day. You either buy and close out, or short sell and cover by the end of day. As much as it is exciting, it has more to do with discipline than any great rocket science. A discipline with respect to targets, capital, and stop losses etc… While these rules are applicable to all trades, in case of intraday trading it gets more critical and pronounced.     

The key to effective intraday trading

If you were to do a quick analysis of winning and losing intraday trades in the market you will realize that it is possible to outperform with a reasonable degree of consistency. On closer examination, you will find that success is more a result of disciplined approach to intraday trading. In fact, it is ironic but those who call the market right tend to lose more money as they lack the discipline required for an effective intraday trader.

Why does discipline become so critical in intra-day trading? Actually, discipline is the thing in intraday trading; and not surprisingly though. An intraday trade is typically leveraged and therefore susceptible to sharp price movements. For example if you are leveraged 3 times and the stock corrects 15%, then the impact of the trade on your capital can be 45%. Now that is quite a lot!

Here is a word of caution! Until now we have been talking about cash market transactions. When you leverage in the F&O market, you are a victim of compounded leverage. Say, you borrow to pay margin for your futures transaction. The margin already has a 5 times leverage. Additionally, you also have a loan to repay. Negative movement can finish you. Quite a thing!

3 Golden rules of intraday trading

Trend is your friend

This is almost a canon for intraday traders. Bottom-fishing and contrarian trades are not for intraday traders. Market is the king and it is your job to stay as close and as much in sync with the market trend as possible. Period!

Don’t bet your bottom dollar                     

Intraday trading is risky business and you need to be clear on how much you are willing to lose. With your best of ideas and execution, you can go wrong. Only bet so much money that you can afford to lose. Don’t lose your shirt.

Daily returns are so much and no more

This has two implications. Firstly, don’t be too greedy. Earning even 2% in a day is great. Secondly, don’t try to extrapolate today’s results to tomorrow. 2% return in a day does not mean 50% returns in a month. That’s ridiculous!

“There is nothing new in intraday trading. What has happened in the past will happen again and again” – Jesse Livermore

6 steps to a sound intraday trading strategy

  1. Keep your intraday trading universe small. Ideally it should be 2-3 stocks. If you try to simultaneously trade in 10 stocks, you will be unable to track and make a proper decision on any of them. As an intraday trader, you need to keep a fundamental and technical tab on all the stocks that you are trading.
  1. You must ideally focus on large cap stocks. There are a variety of reasons. Firstly, they are more liquid compared to many small and mid cap stocks. Secondly, they are followed and tracked by analysts and unlikely to have serious corporate governance issues. That means less of negative surprises.
  1. A stop loss is your key to a successful intraday trading plan. It is absolutely inevitable. Normally, stop losses are set slightly below support for a buy decision and slightly above resistance for a sell trade. You can always use your discretion but consider the loss you are willing to bear.
  1. There is a saying in the market that “profit is what you book, all else is book profits. You must book profits the moment your reach your target. Your belief that the stock can continue to do well is immaterial. You surely do not want to be left holding a dud or miss out on alternate opportunities.
  1. Know what you are buying, why you are buying and when you are buying. It is a myth that an intraday trader does not have to worry about research. You need to track news, volumes, trade data, institutional action, announcements etc. very closely. Fleet-footedness is the key, in fact more so in intraday.
  1. Overnight risk is a strict “No”. Many intraday traders carry forward their position to the next day in the hope of better returns. That is a breach of discipline. Also talk to your broker about the best brokerage package. The cost of trading matters a lot in intraday trading. 

Tutorial 101 on intraday trading from jesse livermore                                

It is impossible to talk about intraday trading without adequate reference to the greatest trader, Jesse Livermore. He talks of four ideas from his experience in the American markets, which have formed the cornerstone of intraday trading for over a century. Firstly, stock markets are designed to fool people. As an intraday trader you must be prepared for that. Secondly, intraday trading is all about trends, and these trends tend to repeat themselves.

Thirdly, Livermore rightly points out that intraday trading can be fascinating but the moment you are carried away by the fascination you tend to become a mere speculator. The key is, therefore, to build a wall of reason around you. Lastly, Jesse Livermore points that the most important decision in markets is when to do nothing. In times of volatility, stupor or uncertainty, the most profitable decision, is doing nothing. Quite a revelation!

Takeaways from the “intraday trading” debate

Intraday trading has been a much-maligned subject in trading and broking circles. But that still contributes a chunk of daily volumes in the market. Try as we may, we cannot wish away its impact. The key lies in understanding and learning how to be an intraday trader more effectively. But the key take-away is that this game of intraday trading is all about knowing your risks, weighing your risks and finally, monitoring your risk.

As Jesse Livermore said, “Emotional control is the most essential thing in the game of trading the market. Never lose control of your emotions when the markets go against you. Never bask in the glory of your success, when the market goes in your favour”. It needs no reiteration that trading discipline combined with emotional discipline forms the cornerstone of successful intraday trading. Understanding this will be your first step to being a more intelligent intraday trader. A good start for sure!

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