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What is Intraday Trading

Intraday trading involves initiating and closing out the trade on the same day. Since the intraday trade is closed out on the same day, the net position is always zero and it does not result in delivery of shares into the demat account at the end of the day.

Basics of Intraday Trading

If an investor buys 1000 shares of Reliance Industries in the morning and closes out the position the same day, then the profit or loss will be adjusted in the client’s trading account. Intraday trading enables clients to get a much higher leverage margin for trading. Intraday trading can involve selling a buy transaction or buying back a sell transaction. Since Indian markets operate on rolling settlements, short selling (without delivery) is only permitted on an intraday basis.

Five Things you need to know about Intraday Trading:

  • Intraday trading has no impact on your demat account. For example, you can buy shares by just paying a margin and you can also sell shares that you do not own. Intraday trading does not result in delivery of shares as the net position at the end of the day is zero. If an investor buys 1000 of SBI in the morning at Rs.272 and sells 1000 shares in the afternoon at Rs.275, then the profit of Rs.3,000 (adjusted for charges) will be credited to your trading account.
  • Intraday trading accounts for a major chunk of the trading volumes on the NSE and the BSE. Traders find it convenient to trade intraday as it requires lower margins and they do not have to worry about delivery, demat charges. Each day, the profit or loss on intraday trading gets adjusted to the client account.
  • Intraday trading must always be done with a strict stop loss only. The stop loss will act as your insurance when the market becomes very volatile as your downside risk will be limited to the extent of the stop loss level.
  • The margins on intraday trading are much lower than in normal trading. Also, within intraday trading if you place cover orders then your margin can be still lower. When your margin is lower you effectively get more leverage. A cover order is an order on the exchange wherein the stop loss is defined and placed at the time of placing the order itself.
  • Intraday trading does not rely too much on fundamentals. On the contrary, intraday traders focus more on technical charts and news flows to take trading decisions. Most intraday traders focus on very short term triggers for stocks as they need to close out the trade on the same day. Intraday trading is fairly risky but the risk can be effectively managed by using measures like stop losses, profit targets etc.

3 things to remember while day trading

Intraday trading, by definition, is more risky as you need to necessarily close out the trade on the same day and it is a leveraged trade. However, the following steps can help intraday traders:

  • Always start intraday trading with a trading rule book. A trading rule book is your trading guide which lays out how you will take positions, when you will close positions, how you will manage the risk of your overall capital, how much loss you will take in a trade, how you will set your risk-return trade-off etc.
  • Never get into an intraday trade without defining your stop loss and the profit target in advance. Successful intraday trading is all about having a positive risk-return trade-off. Risking Re1 to earn Re1 is bad trade-off. Your trade-off should ideally be 2.5 times to 3 times your risk of loss.
  • To be a successful intraday trader, you need to be your own chartist. But above all, you need to maintain a trading diary on a daily basis. This trading diary maintains a log of your daily intraday trades and the justification. More importantly, the trading diary is reviewed every day evening and reasons for losses and profits are analyzed. That builds the habit of right intraday trading.
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