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Risks Involved in Intraday Trading

Risks Involved in Intraday Trading

Intraday trading is risky for a variety of reasons. Firstly, intraday trading operates within the window of five hours and the position needs to be closed out within that time period. Secondly, volatility works against the intraday trader. It is much easier to trade a stable stock compared to a volatile stock as stock losses can get triggered quite rapidly in case of volatile stocks. Thirdly, intraday trading also runs the risk capital erosion as you trade with finite capital. Capital erosion impacts your funds available and the total leverage that you will be permitted to take.

Some of the key risks in intraday trading

  • The first and the most basic risk in intraday trading is the stock selection risk. If you get your stock selection wrong, then you are likely to get the full intraday trading chain wrong. You need to select stocks that are liquid and exhibit clear technical chart patterns. Most intraday trading loses occur because the traders get their stock selection wrong.
  • You need to get your levels and technical analysis by itself is not a perfect science. It is based on estimates and past patterns. When you identify and trade around certain levels you are assuming that past patterns will repeat. If that does not happen, you are likely to run the risk of stop losses triggering on either side of the trade.
  • Market volatility is another major risk in intraday trading. Even with your best of stocks and level analysis, if the market suddenly turns volatile due to external macro factors then you will be staring at stop losses getting triggered. The problem in volatile markets is that if a string of stop losses get triggered in a day then your trading capital may be at risk.
  • Risk of overtrading is something you need to be careful about. Overtrading happens due to a variety of reasons. You could overtrade because you may be trying to recover losses you made. Alternatively, you may average your positions when the stop losses are approaching and that could also lead to overtrading. Either ways, it is a risky proposition.
  • Intraday trades are essentially leveraged trades. Just as profits can be magnified in intraday trading, your losses can also get magnified in intraday trading. This is more so when you are taking on higher leverage through cover orders or when you are trading intraday in futures and options. In such cases, the losses get multiplied by another factor.

Intraday trading is risky but risks can be managed

The key to consistent performance in intraday trading is managing your risk. Here are 3 ways you can manage your risk effectively

  • Set clear los limits when you trade intraday. These losses need to be set at various levels. For example, each trade should have a stop loss and that needs to be strictly adhered to. Secondly, there should be daily loss limits. When that loss is breached the trader must have the discipline to shut the terminal. Lastly, you need to set capital loss limits at which point you must go back to the drawing board and rethink you intraday trading strategy.
  • One of the ways of managing risk is through discipline. The intraday trader must adhere to discipline with respect to stop losses, trading levels, types of orders, profit booking levels etc. That is best insurance against market volatility.
  • Trades have to be monitored in real time based on actual losses and MTM losses. Also, positions that are open must be monitored for technical charts, momentum shifts, news flows and any corporate announcements. Vigilance is a good way to manage risk!
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