Intraday trading is not just about getting your timing right. You need to know the basics of trading and do a lot of groundwork. Yes, the potential for generating returns is high. On a good day, you could make substantial profits within a few hours. But one must also be aware of the risk. The following intraday trading rules help you to get your trades right.
- Outline your strategy
Intraday traders have to work their magic within a small time window. Any position they enter in the morning must be closed by day end. With market conditions changing by the minute, hope does one cope? Start by drawing up a clear plan that includes key details: which stocks to trade, when to enter and exit, lot sizes, how many trades to execute in a day, and so on. Once you start trading, stick faithfully to your plan.
2. Choose stocks wisely
Pick liquid stocks as these can be bought or sold more easily. Look also for controlled volatility. This will bring you sharper price swings based on which you can make profitable trades. Beginners could also track stocks that follow the market or particular indices, for their movements are easier to predict.
3. Select entry and exit points
Many a time, traders enter a trade after having monitored a stock for weeks and months to identify tradeable movements. At this stage, they will have already ascertained their stop loss triggers and profit targets. One can modify the triggers at a later stage, but it is mostly advisable to follow the original game plan.
4. Manage risk
Trade with only what you can afford to lose and maintain clear guidelines about when to stop trading for the day. Some traders bow out if the losses amount to 4–5% of their overall capital. Others set stop loss triggers on individual trades. Seasoned traders are serious about risk management because they know that not all trades are winners.
5. Avoid emotional decisions
If a stock is plummeting against expectations, should you hold on because you are hoping for a reversal? Let the market be your guide. It may be sensible to cut losses and exit the trade if your stop loss is triggered. Also, don’t be greedy and hold on to a fast-appreciating stock for longer than planned just to book more profit. Look at your data before changing your strategy.
6. Stop trading
Some days are bad for business. In such a case, just cut your losses and get out. If you keep trading, you could notch up even more losses. As an intraday trader, you should know when to sit tight.
7. Do your research
Set aside time to examine technical charts, identify price patterns, and read the research. Closely scrutinise the movements of every stock on your wish-list before entering a trade. Also, keep an eye on stocks that are in the news. They could carry some volatility, indicating opportunities for profitable trades.
At the end of every trading day, record the day’s trades and the strategies used. Then, once a week, study the records to see which techniques worked in your favour and which did not. Once you have some practice, you should develop a better sense for setting up intraday trading plans. But don’t stop following the basic intraday trading rules. If you need support, open an account with a broker like Kotak Securities that offers extensive educational material for intraday traders.