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An Ultimate Guide for Intraday Trading

When you trade intraday, you are trading on a very limited trading window of around 5 hours. Normally the first half hour and the last hour are too volatile and hence you cannot really trade this segment effectively. Since you need to protect your capital from erosion, there is only so much risk that you can taken in the form of a stop loss. The intraday trading guide provides you a framework of how to operate within these constraints and at the same time being profitable in your trading. Managing the risk and the process is at the core of successful intraday trading.

Framework for an Intraday Trading Guide

  • The first guideline pertains to the selection of stocks. You need to select stocks that are liquid and have low basis risk. Also, stocks cannot be too volatile as they could trigger stop losses. If the stock is a low beta stock then chances of price movement intraday are quite low. The focus, therefore, should be on selecting stocks that give movement and are predictable.
  • The timing of entry and exit matters a lot in intraday trading. When you are trading with an Rs.5 stop loss and Rs.12 profit target then even if you improve the timing by Rs.2 it makes a huge difference to your profitability in the intraday trade. Use charts and news flows to squeeze the maximum by getting the best trading levels possible.
  • Set stop losses and profit targets well in advance and apply them at the time of initiating the trade. More importantly, follow these stop losses and profit targets religiously. Don’t try to average positions when the stop loss is triggered and don’t try to do a rethink when the profit targets are achieved. This is part of your trading discipline.
  • Trade on the side of momentum. This point needs to be repeated time and again and always remembered. It is not the job of an intraday trader to outguess or outsmart the market. An intraday trader is supposed to read the direction of the market, understand the underlying momentum and trade within the limits.
  • Monitor your positions closely and maintaining a trading diary. Many intraday traders do not emphasize on these two factors, but they are critical to profitability. You need to monitor positions based on charts and news. The trading diary helps you to record your trades and evaluate where you went right and where you went wrong.

The Trading Book and the Trade Diary

Two of the best ways to build your own guide for intraday trading is to gradually build up your trading book and your trading diary. Here is how:

  • The trading book is likely your constitution for trading. It actually guides your trading and helps you define the maximum loss levels, the risk reward ratio, the trade-offs, factors to consider, protecting losses etc. When any trigger is not in consonance with the trading book, always go by the trading book. That is your underlying constitution.
  • The trading diary is more of an analytical recording and evaluation of your trades. It not only records the positions and the logic, but also does an EOD evaluation of where you went right and where you went wrong. The beauty of the trading diary is that the key learnings become a part of you trading book.
  • Remember that if you want your trading book and your trading diary to really serve your purpose, then you need to be totally honest and transparent while writing it. The more honest you are about the mistakes you made in intraday trading, the better your opportunities to learn from these mistakes and take corrective action in future.
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