What is Intraday trading?

What is Intraday trading?

Intraday trading means a trader is buying and selling shares or other trading instruments on the same day to benefit from the stock price movement during the day. In short, a trader closes his open trades before the closing of the trading session and thus within the method, he doesn't end up carrying any overnight risk which can impact his profits. There has been a sharp surge in intraday trading volumes in recent years due to increasing Demat account holders and reduced trading price due to the introduction of the Discount Broking concept, wherein the charges are unlike what a traditional broker used to charge as brokerage.

Additionally, Intraday trading can be done in any segment whether it is cash, futures and options (F&O) of stocks or indices, commodity, and currency derivatives. One advantage of intraday trading is one can take leveraged positions in stocks that are not available in F&O segment.

Even though intraday trading eliminates overnight risk, there are other risks such as sudden news during trading hours, illiquidity in the instrument, and fluctuating volatility of the instruments. Other factors such as trading plan, money management, and risk management also impact a traders’ profitability in the long term.

Trading is a stream where profits and losses affect human psychology and thus a trader’s decision-making ability gets highly impacted by his state of mind while placing a trade. High optimism or overconfidence due to large profits or long streaks of profits can lead to taking oversized positions by taking a big risk or holding losing positions for a longer time in the hope of turning them positive. Similarly, recent losses or streak of losses can lead to taking undersized positions despite the right trading setup or cutting profit-making positions early. Hence it is very important to trade based on a trading plan and not trade based on one’s emotional bias and gut feelings. 

Factors a trader must consider while determining the best stocks for intraday trading

There are various things to keep in mind while determining the best stocks for intraday trading.

Trader’s criteria

Firstly, traders should decide on criteria as to how much risk should be taken per trade and how many maximum positions should remain open at a time. As there are occasions when multiple trades are open which can become quite complex as long and short trades would be open in different stocks.

Corporate event 

If trades have been taken on some technical setup, it is prudent to check if there is any corporate event scheduled on the same stock. This checkup should be done on a routine basis as scheduled events bring both challenges and opportunities with them, whatever the outcome may be, it is good to remain informed of any scheduled events.

Volatility and Liquidity

Volatility and liquidity are also very critical for intraday trading. High volatility means large price movements during the day which translates to more trading opportunities and low volatility means fewer trading opportunities. The volatility should not come at the cost of liquidity as liquidity is very crucial for entry and exits during the day and to place sizable trades.

Traders should avoid highly volatile and thinly traded stocks as there are times when traders get stuck on one side of the trade and cannot exit due to illiquidity or circuit limits. Sometimes the spread between the bid and ask prices is also wide enough which impacts trading costs. This occasionally happens in thinly traded penny stocks as well as thinly traded index and stock options. Volatility will be attributed to the behavior of stocks also. The pattern of volatility should not be seen in the context of a particular day or week, rather stocks that have a history of volatile trading and are highly traded should be selected as trading candidates. One such list of stocks is mentioned below. 

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