IS INTRADAY ACTUALLY HIGH-RISK TRADE?

7 jan 2020

Intraday trading appeals to a lot of people, primarily due to the potential high returns that most day traders are able to get. However, this does not indicate in any way that the entire process is risk free. In fact, with good returns comes even greater risk, especially when the strategy is prepared without research-based data points.

As intraday trading involves buying and selling of financial securities within the same trading day, it is a highly challenging task demanding immense patience, a solid risk management strategy and a sharp eye to monitor movements in the highly volatile market.

Due to the potential returns offered by day trading, first-timers and novices are attracted to this form of engagement in the stock market. It is strongly suggested that all day traders take the help of investment advisors in order to plan all trades in a meticulous manner. Even with the help of advisors, the stock market can pose daunting challenges for new traders.

Before understanding the ways to navigate the rough paths of day trading, let’s look at some of the major risks involved in day trading.

High Fluctuations in Price

For the untrained and initiated, price fluctuations in the stock market can be really stressful. These fluctuations are uncertain in nature and even the most experienced traders can sometimes get losses due to the high volatility.

No Trading Strategy

This is probably the biggest mistake that all traders make, especially when they are new to the stock market. Working without a properly framed strategy can lead to dire consequences with the actual loss exceed the expected numbers. The case is worsened when the person trades without any strategy. The stock market is the last place where you should go with your instincts.

Wrongly Timed Exit

This is a common risk associated with day trading. A wrong timed exit means that the trader pulls out of a trade in expected of experiencing a downward trend, whereas the actual market conditions indicate a positive movement just after. This can be avoid to some extent with back-tested research data and day trading recommendations.

Losing Control Over Emotions

One should never lose control over their emotions in the stock market. Whether it is joy or sadness, it is absolutely critical to be in control and analyse the situation based on numbers rather than going ahead with your emotional outburst. Even experienced traders have incurred loss by losing control of their emotions. Learning how to exercise and practice control on emotions cannot happen in a day. It takes years to be able to reduce the impact of emotions on crucial decision making.

Technology Challenges

We are all surrounded and dependent on technology today. The smallest tasks require technology to be able to complete efficiently. Most brokers now have apps from where the traders can execute the trade. Due to technology issues or other challenges, the trades may not be placed on time or there might be a lag, due to which there can be loss.

Having discussed the potential risks involved in day trading, let’s explore some of the ways in which one can become a successful intraday trader.

Invest in Large Quantities

A high liquidity stock means that there should be plenty buyers and sellers for that stock. So, you should make sure that the stock you are trading in is liquid enough which will make it easier for you to close and exit your position by the end of the day.

Trading in multiple high liquidity stock help you in squaring off your positions successfully at the end of the trading day. Since the movement in intraday trade is not usually much, you need to place large orders to book profits, which again require the liquidity to be good.

Know the Right Tick Size

The gap between two orders in the order book is known as the tick size. The minimum gap is five paisa. So again, to ensure that the order is bought or sold at the right tick, there should be enough volume or liquidity in that stock. If the volume is not enough, the order can be executed several ticks away which can be against your plan or strategy.

Own Your Trade

It is always necessary to know who owns a stock before trading in it. Details of a stock’s holding pattern are available on the BSE and NSE exchange. A closely owned stock, i.e. a stock with a very few operators like brokers having 70-80% share, can be highly volatile and thus can reduce your chance of having a successful trade. A stock should be always widely owned, which in turn helps in minimizing risks.

Set A Stop Loss

A stop loss is a trigger which will automatically square off your position if it falls or rises below a specified limit. It is one of the most important factors in an intraday trade to minimize risk. As the name suggests, it helps to stop your loss after a specified limit. In a volatile market the stock prices can rise or fall sharply incurring huge losses. Stop loss helps you to limit your losses if the stock prices fall below a specified level, and for traders who short sell it limits losses if the prices rise above a specified level.

Set Your Target and Achieve It

You should always stick to your target initially set for a stock. The time to close or exit a trade in case of intraday is very limited and thus you should be very quick and observant.

Always Take The Help Of An Investment Advisor

These are some of the basic guidelines which should be followed for intraday trading. Intraday trading is a high-risk trade practice as it requires you to square off and exit your position on the same day. You should either have enough experience of stock market or a smart advisor for your help before entering the intraday trade practice.

If you are new to trading and don’t have enough experience of market trends and trading it is better to take guidance from a SEBI registered investment advisor who can guide you with the trade. One of the ways in which investment advisors can really help you plan your trade is by evaluating your risk profile and ensuring that you trade only within the risk limits specified in the risk analysis.

Make sure you check out this 7-step checklist to follow when choosing an investment advisor, in case you are confused where to begin.

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