What is Intraday Trading: Meaning, How It Works & Tips for Beginners

There are several approaches to investing in India's stock market, broadly categorized into two types: long-term investing and intraday trading. You can choose to follow either of these strategies or allocate your capital to both, depending on your investment objectives and risk tolerance. Intraday trading requires more attention to detail and spontaneous decision-making ability. To understand this type of trading, let us dive deep and learn everything about intraday trading.

What Is Intraday Trading and How Does It Work?

Buying and selling stocks on the same day is called intraday trading. It is also known as day trading. Intraday trading in the stock market requires quick decision-making, disciplined execution, strong risk management and a comprehensive market understanding. 

While doing intraday trading, traders have an agenda to leverage the rise and dips in the stock price and profit from the differences. This is done by monitoring fluctuations in stock prices.

You can take either long or short positions based on the anticipated stock price movement during trading hours. Let’s understand both long and short positions with an example:

Long position

Long position means you are buying the stock first with the intention of selling it later. If you expect the price to rise during the day, you would prefer to purchase the stock first and sell it off (square off) later in the day, at a higher price.

Let’s understand this with an example:

Stock Market Outlook – Bullish

• Buy the stock at Rs. 100 at 9:30 am

• Sell the stock at Rs. 102 at 1:30 pm

• Book a profit of Rs. 2 per share

Short position

On the other hand, a short position means you will be selling the stock first with the intention to purchase it later at a comparatively lower price.

So, if you expect the price to fall during the day, you would prefer to sell the stock first, and square off your position later in the day at a lower price.

Let’s understand this with an example:

Stock Market Outlook – Bearish

• Sell the stock at Rs. 100 at 9:30 am

• Buy the stock at Rs. 98 at 1:30 pm

• Book a profit of Rs. 2 per share

And what if the price of that stock rises later in the day? Well, in that case, you will be inclined to cover your position at a loss.

Intraday Leverage

Typically, stockbroker’s offer leverage in intraday trading. Leverage would help you in increasing your trading position without having to spend a substantial amount from your pocket.

Let's understand this with an example.

Suppose you have Rs. 1000 in your trading account. Your broker offers you a leverage of 10 times on the stock of ABC limited, currently trading at Rs. 1000. This means you can buy up to 10 shares worth Rs.10000 (1000x 10) at a time.

Now, if you purchase 10 shares in the morning and were able to sell all of them at Rs. 1040 in the afternoon, your profit is 40*10 = Rs. 400. Thanks to the leverage, you now have a huge 40% (400*100/1000) Return on Investment (ROI).

While using leverage can help you purchase a stock that you can't afford, it comes with some degree of risk. For example: If the stock you’ve invested in falls, to say Rs. 980 by afternoon, you may lose 20% of your capital investment. That’s why it's recommended to use leverage judiciously in the stock market.  

Difference Between Delivery and Intraday Trading

Both intraday trading and delivery-based investment are different approaches you can choose from depending on your time horizon and risk profile.

To make it simple, let’s look at them one by one:

Intraday trading

• Holds a time horizon of a single day only and within trading hours.

• You need to book profit/loss on the same day.

• Your broker can offer you the advantage of leverage to increase your profitability. However, you need to note that in the event of adverse stock-price movement, leverage may increase your losses.

• You can choose to take help from technical analysis to pick the right time to enter and exit a trade position to increase your chances of profitability.

• You can take either long or short positions, based on the anticipated stock-price movement during trading hours.

Delivery based investment

• Requires full payment of money to credit shares in your demat account.

• You can sell shares whenever you feel comfortable.

• The time horizon can range from one day onward.

• This may be a good investment approach for all your long-term goals.

• As a long-term investor, you can rely on fundamental analysis to choose stocks. This analysis examines a company’s management composition, rivals, industry status, growth movement, growth potential, profit, and revenues to ascertain its advantage. 

How to Start Intraday Trading as a Beginner

You need to first open a trading and demat account with a stock broker. You can place an order to buy or sell stocks from your trading account. A Demat account is used to hold your stocks in the demat form.

Opening a trading and demat account is as simple as opening a bank account.You can open a demat and trading account online with any stock broker by following these steps:

• Fill out the account opening form available from the stock broker.

• Digitally sign and submit the agreement using KYC documents such as PAN and Aadhar cards.

• Receive your Client ID and Demat account no, and you are ready to trade in the stock market.

Essential Tips for Successful Intraday Trading

1. Choose Liquid and Volatile Stocks

When selecting stocks for intraday day trading, focus on liquid and volatile stocks. Liquidity ensures that there are enough buyers and sellers in the market that ensure quick execution of trades. On the other hand, volatility provides opportunities for booking the profits because of the price movements.

2. Follow a Watchlist

Create a stock watchlist to closely monitor trading opportunities. This list should be made by aligning the trading strategies and showing promising patterns. Traders should regularly monitor their watchlist and keep a close watch on their targeted companies’ financial positions or major events.

3. Utilize Technical Analysis

Doing a technical analysis of the stocks is important for the intraday traders as it helps in identifying the potential entry and exit points, price patterns, momentum, and trends. This technical analysis can be done with the help of technical indicators like moving averages, RSI, and Bollinger Bands.

4. Set Realistic Targets

Intraday trading is a game of quick profits, so it's crucial to set realistic profit targets. Determine your risk-reward ratio before entering a trade, ensuring that the potential profit outweighs the potential loss. Set profit targets based on technical levels and when your targets are met, avoid the temptation to hold on for higher gains, as market conditions can change rapidly.

5. Use Stop-Loss Orders

Always set stop-loss orders for every trade you enter during an intraday trade. This helps in limiting your potential losses by automatically exiting the trade if the price moves against the set targets. The stop-loss levels can be determined based on the technical analysis conducted in earlier steps.

6. Manage Risk and Position Sizing

Risk management is key for long-term gains in day trading. Risk tolerance must be decided before entering into intraday trading and always avoid putting a bulk portion of the assessed capital on a single trade to minimize the risk.

7. Stay Informed and Adapt

Always stay updated with the latest market news, economic events, and company announcements that can impact the stocks you trade. Reliable sources of information such as financial statements, press releases, or stock research of well-known stock brokers must be considered to make informed decisions

Key Benefits of Intraday Trading

There are several benefits of intraday trading:

1. Positions are not affected by the probability of negative overnight news that could have a potential impact on stock prices.
2. Ability to utilize stop-loss orders—the act of raising a stop price to minimize losses from a long position
3. Enhanced access to margin and, as a result, the increased leverage.
4. Traders get more possibilities to learn the stock market
5. Lower or nominal brokerage fees is charged on intraday trading as delivery expenses of transferring security in the name of an investor are forgone. 

Risks Associated with Intraday Trading

High Volatility: Volatile markets offer good opportunities to profit in a big way. But too much volatility may do more damage than good. That's why you should ideally adopt the middle path at the start, where you can trade stocks with limited volatility.

Too much leverage: Taking too much leverage can be risky. Avoid taking higher leverage to earn more profit, as it can lead to high losses if market movement is not in your favour.

Take position without stop-loss: It is necessary to put stop-loss for your open position to avoid unexpected loss in case of unfavourable movement.

Important Indicators for Intraday Trading

The best indicators for day trading are:

1. Moving Average Convergence Divergence (MACD): MACD is used to identify trend changes, momentum, and potential buying and selling opportunities. When the MACD line crosses above the signal line, it is interpreted as bullish, indicating a potential buying opportunity. Conversely, when the MACD line crosses below the signal line, it is seen as a bearish signal, indicating a potential trend reversal or a selling opportunity.
2. Relative Strength Index (RSI): RSI is a technical analysis tool used to identify overbought or oversold conditions. Usually, an asset is considered overbought when its RSI value is above 70, and considered oversold when its RSI value is below 30.
3. Bollinger Bands: Bollinger Bands measures the volatility of stocks by creating a band or envelope around the stock’s price. If the price of an asset reaches the upper band, it may be considered overbought. Conversely, if the price goes to the lower band, it may be considered oversold.
4. Moving averages: Two main types of moving averages are used in technical analysis: Simple Moving Averages (SMA) and Exponential Moving Averages (EMA). Both SMA and EMA are commonly used to identify trend directions, support and resistance levels, and potential buying or selling opportunities. . 

How Are Intraday Trading Gains Taxed?

The income you make from equity trading in intraday trading is regarded as speculative business income. So, this speculative business income gets added to your overall income and is taxed based on your income tax slab rate.

Brokerage Charges and Margins in Intraday Trading

Brokerage charges in intraday trading vary from stockbroker to stockbroker. Some brokers charge a fixed charge per order, while some charge as a percentage of the order value. You can check these charges with a stockbroker before opening an account.

Conclusion

Intraday trading can be beneficial if you take positions that align with your risk appetite and adhere to established rules. Before starting your trading journey, it's essential to open a trading and demat account with a stockbroker and allocate funds for this purpose. You can take both long and short positions based on the expected price movements and volatility in the market, which can work to your advantage. Utilizing technical analysis can aid you in making informed buying and selling decisions.

Additional Read: 5 smart tips for beginners in the Stock Market

Additional Read: Intraday Trading Strategies

Intraday Trading FAQs

1. Is Intraday good for trading?

The first rule in the intraday trading guide is that you should not get lured into intraday trading if you cannot commit to the market trends. To efficiently charter the day trading waters, the following is needed:

• Market understanding

• Technical analysis

• Time & Discipline

2. What time is best for Intraday?

As per experts, the best time to do intraday trading is between 10.15 AM and 2.30 PM as the morning volatility often subsides by 10.00 to 10.15 AM.

3. What is the difference between Day trading and Intraday Trading?

Intraday trading is also called day trading as it is bought and sold on the same day.

4. Which is better, intraday trading or delivery-based investments?

Intraday trading and delivery investing serve different purposes. Intraday traders aim to profit from short-term price movements within a single trading day. At the same time, delivery investors take a long-term approach, holding onto their investments for a long period. You can choose the strategy that aligns best with your investment goals, risk tolerance, and time horizon.