What is Intraday Trading?

Tue Dec 22, 2020, 07:14 pm | by Caitlin McCormack | No comments

The allure of day trading is irresistible; executing short-term trades in an attempt to profit from the financial markets. However, success in intraday trading requires a very dynamic, disciplined, alert, and cool-headed trader who can survive defeats, digest victories — and bounce back instantly from both.

Truth be told, intraday trading wasn’t as accessible as it is now. Initially, this practice was only available to professionals working in brokerages, large financial institutions, and trading houses. However, the rise of online trading platforms has allowed the average trader to hop in on the game.

Remember, intraday trading isn’t a get-rich-quick scheme, nor is it a practice that will take years to gain consistency. Be ready to dedicate about 6 months honing your skills and mastering a strategy before you’re comfortable with it and are ready to put your cash to the test.

Intraday trading isn’t as straightforward for the novice trader, so we’ve created this guide to provide some inside scoop on the practice.  

What is intraday trading?

Intraday trading simply involves trading of securities during the market’s regular business hours in a single day. At the close of the market day, day traders will have closed their stock positions out. Although all trades are executed with the aim of profiting from the difference between the selling price and buying price, intraday trading or day trading differs because positions aren’t held overnight.

Stock day traders typically work while the exchanges are open — from 9:30 a.m. to 4:00 p.m. Although futures markets are usually open 23 ½ hours per day, day traders in these markets tend to replicate the stock market hours and want to be out at the close of the futures trading, usually 4:15 p.m.

The most common day trading markets are futures, stocks, and foreign exchange (forex). You could make day trading a hobby or transform it into a full-time career. That notwithstanding, day trading can be a lucrative strategy for some, but its long-term success rate is low.

What indicators do intraday traders use?

Most intraday trading decisions revolve around price movements. However, day traders aren’t all equally adept at analyzing and interpreting these movements. This is why most intraday traders depend on indicators to guide their decision making. Intraday trading requires a precise timing of buy or sell decisions to be profitable — combining too many indicators may be counter-productive and eventually slow down your decision making.

Some commonly used intraday trading indicators include.

1. Moving Averages

The daily moving averages (DMA) is a widely used indicator. Simply put, the moving average is a line that connects the average closing prices over a given period (on the stock chart). The moving average is usually a more reliable indicator over a longer period. With this indicator, you can better understand the underlying price movements — since prices don’t move in one direction.

When short-term averages exceed the long-term averages, it’s usually an indication of a bullish market trend. This lets you pick the best entry position as well as the place to use stop-losses.

2. Relative Strength Index (RSI)

You’d typically use the Relative Strength Index to compare the share’s price gains and losses. The data takes the form of an index that provides the RSI scoring rate — which ranges from 0 to 100. An RSI scoring rate of above 70 indicates an overbought market, hence a price correction or fall is due. You’re recommended to sell your stock at this period.

An RSI of below 30 indicates an oversold market, so you can expect the price to take an upward trend soon. There’ll always be a buy recommendation at this stage.

3. Momentum Oscillators

When it comes to stock trading, prices are always moving up and down. In that case, the best indicators for day trading should help you keep up with the price movements. Momentum oscillators can help you identify instances in which the stock market is experiencing a short-term cycle – whether bullish or bearish. This indicator lets you identify this scenario and decide whether the market will experience some rapid changes in the near future.

4. Commodity Channel Index

The Commodity Channel Index is a useful indicator in the commodities market, but it can apply to the stock market as well. It helps day traders identify new trends and provide warnings about any extreme conditions. It measures the difference between an asset’s current market price and its historical average.

The Commodity Channel Index has values of 0, +100, and -100. A positive value indicates an uptrend while a negative value indicated a market downtrend. Traders often couple CCI with the relative strength index (RSI) to acquire information about oversold and overbought stocks.

5. Stochastic Oscillator

The stochastic oscillator is an indicator that measures a security’s closing price in relation to a range of prices over a given period. This indicator follows momentum, which is a key aspect since momentum typically changes direction before the price does.

Day trading indicators don’t provide the same information, so your choice of indicator should be guided by these factors:

  • Volume. This aspect of indicators relies on the trade volumes; how they change with time as well as the number of stocks that are being sold and bought over time.
  • Volatility. Want an indicator that tells how much the price is changing in a given period? Lower volatility indicates small price moves while high volatility indicates huge price moves.
  • Trend. Some indicators show the market trend or the direction in which the market’s moving.

Intraday trading strategies

Intraday trading strategies help you play the markets to leverage short-term fluctuations in the value of securities. Some common strategies include:

  • Scalping is a popular day trading strategy that seeks to capitalize on minute price changes. With this strategy, traders place short-term trades with small price movements with the aim of reaping a small profit from each trade. The hope is that these small profits will have accumulated to something substantial at the end of the trading day.
  • Reversal has been hotly debated as a dangerous strategy, but it still attracts the interest of many day traders. With this strategy, you are simply defying logic by trading against the trend. As a result, you should be in a position to accurately predict pullbacks – which requires vast market knowledge and experience.
  • News-based trading relies on both news and market expectations, before and after news releases. You need a skilled mindset to seize trading opportunities from the high volatility around trending news events.
  • Range trading identifies the scope within which investors purchase and sell securities over a short period. This strategy uses support and resistance levels to inform buy and sell decisions.

Pros and cons of intraday trading

Some advantages of intraday trading include:

  • Not affected by overnight news. Intraday trading ends the overnight risk that most swing traders have to deal with. Since your trades are closed at the end of the trading day, you don’t have to worry about overnight news dinging your portfolio.
  • Increased leverage. Some brokerages will give you more leverage if you’re able to maintain a certain account balance, say $25,000. As a result, you can trade with more money than you actually have in your account, resulting in higher profits.
  • Lower brokerage commissions. The brokerage commissions associated with day trading are usually lower than those you’ll incur with other forms of trading.
  • You won’t lock in funds for a long time. With day trading, you’ll close all your positions at the close of the trading day. And since you won’t lock in funds for long, you have the flexibility and liquidity to make frequent trades.

Intraday trading has its fair share of disadvantages including:

  • Requires split-second timing. You won’t make a fortune out of day trading if you’re afraid of commitments or slow in making decisions. Intraday trading requires you to analyze markets quickly and make a decision.
  • Risky trades. Intraday trading is inherently risky. While your market analyses may not always go your way, the use of leverage can result in more losses — and in some cases all of your money.
  • The Pattern Day Trader (PTD) rule. The PDT rule is supposed to restrict you from executing more than 4-day trades within a period of 5 days using a margin account. Your trades must make up over 6% of your margin’s account trade activity during the 5-day period, otherwise, you’ll be restricted from further trading.

Final Thoughts

Day trading isn’t for the casual investor who has little understanding of the markets. Besides, intraday trading styles vary; you may prefer multiple trades throughout the day or wait for the perfect market conditions to place a single day trade. Whatever your approach, remember that you can lose a lot of money in a fraction — with a single faulty trade.

However, day trading is still an opportunity to reap massive profits from daily market fluctuations — and you don’t have to worry about overnight news events reversing your gains. A good rule of thumb to keep winning in this practice; don’t get caught up in the adrenaline rush of a few big wins.