Investors with a long-term outlook usually follow the buy-and-hold strategy in the stock market. However, if you are interested in short-term positions, you need to focus on other types of trading. One such ultra-short-term trading technique is intraday trading, also known as day trading.
What is intraday trading?
Intraday trading is the process of buying and selling stocks and securities within the same trading day. You can choose to go long and buy stocks or securities or take short positions by selling at a high price and buying them back at lower price. The important thing is to close all open positions within the same trading day, so no trade is carried over to the next trading session.
Best intraday trading strategies
To capitalise on short-term price fluctuations, there are many good intraday trading strategies that you can use as a part of your overall plan. Let’s take a closer look at some of the best intraday trading strategies commonly used by traders.
1. Momentum trading strategy
Momentum trading is one of the best intraday strategies if there is a clear trend in the market. This intraday trading strategy is effective when there is a strong price momentum in a particular direction. You can use it to place orders that align with the direction in which the market is strongly trending
.For example, if a stock shows strong bullish momentum, you can take a long position and exit it when the price increases. Similarly, in the case of a bearish momentum, you can short sell the stock.
2. Reversal trading strategy
If a trend reversal is imminent, this is one of the most effective intraday trading techniques you can use. You need to use candlestick charts and technical indicators to assess if a prevailing trend in the market is likely to reverse during a given trading day. If the signs all point to an impending reversal, you can enter trade positions accordingly.
Since this is a high-risk strategy that goes against the current market trend, you must use stop-loss orders to limit the downside risk. Otherwise, you could lose a significant portion of your capital if the market trend does not reverse.
3. Breakout trading strategy
In a sideways market, stocks generally trade within a specific price range. There will be defined support and resistance levels. However, at some point, the stock price may break out of this established range. Here is where the breakout trading strategy can be effective. It is a simple intraday strategy that you can use if you expect a price breakout.
A short position may be suitable when the price breaks out below the support level since the price trends downward. Similarly, a long position could be ideal if the price breaks out above the resistance level.
4. Scalping trading strategy
When you use it right, scalping can be a very successful intraday trading strategy in a volatile market. Since there are many small but frequent price fluctuations, making an intraday trade that offers large profits may not be possible. However, with scalping, you can make multiple trades that each have the potential to deliver small gains.
By the end of the trading session, these small gains can add up to a considerable profit. However, scalping can be a high-risk technique that could also lead to many small losses that add up during the day. So, ensure you set stop-loss limits as needed.
5. CFD trading strategy
CFD trading allows traders to take advantage of price movements without owning the assets, using leverage to control larger positions with less capital. It enables trading across various markets and short selling. However, the amplified risk from leverage necessitates strict risk management, including stop-loss orders and careful margin monitoring.
6. Gap and Go trading strategy
Gap and Go trading exploits price gaps at market open, driven by news or earnings reports. Traders identify gaps with high volume, entering long positions on upward momentum or short positions on downward moves. This strategy's success hinges on swift action and volume confirmation, with stop-loss orders to manage risk.
7. Bull flag trading strategy
The Bull flag strategy identifies continuation patterns in uptrends, marked by a sharp price rise (flagpole) followed by consolidation (flag). Traders enter long positions on breakout above the flag with increased volume, using the flagpole's length to set targets and placing stop-loss orders below the flag to prevent losses from false breakouts.
8. Moving average crossover strategy
The moving average crossover strategy is a widely employed intraday trading technique in India. This method involves monitoring price fluctuations relative to a calculated moving average to identify potential momentum shifts. When a security's price surpasses the moving average, it signifies an upward trend, prompting traders to consider long positions. Conversely, a price below the moving average suggests a downward trend, indicating a potential opportunity for short positions.
9. Pivot point strategy
The pivot point strategy is a valuable tool for identifying critical support and resistance levels, particularly in the forex market. Range-bound and breakout traders can leverage this strategy to determine entry and exit points. A pivot point marks a potential inflection point where market sentiment shifts from bullish to bearish, or vice versa. Subsequent price movements beyond the first support or resistance levels often indicate a potential move toward the second level. As such, pivot points serve as essential indicators for predicting price direction, setting profit targets, and establishing stop-loss orders.
10. Pullback trading strategy
A pullback trading strategy is employed to capitalize on temporary price reversals against an overarching trend. This approach helps mitigate potential losses associated with trend following. The strategy is most effective when applied to high-volume, strong equities. It is crucial to distinguish between a pullback and a trend reversal. The pullback strategy typically involves selling overvalued securities and buying undervalued ones. Ideally, purchases should be executed shortly after a breakout. While pullbacks often persist for several trading days, a reversal signals a more significant shift in market direction.
Intraday trading tips
To enhance your intraday trading success, consider these essential tips:
Selecting liquid shares for intraday trading
The initial step in intraday trading involves selecting liquid shares. As these securities must be sold before the market closes, opting for liquid options is crucial. It is advisable to focus on two or three large-cap stocks with high liquidity. This ensures seamless buying and selling, enabling capitalisation on potential price fluctuations throughout the trading day.
Leveraging stop-loss orders to mitigate risk
Employing stop-loss orders is a prudent strategy to limit potential losses. This order automatically sells the shares if the price drops below a predetermined level. For instance, if a stock is purchased at Rs. 1,500 with an anticipated price increase, setting a stop-loss at Rs. 1,480 can restrict losses to Rs. 20, even if the price declines further.
Avoiding volatile stocks
While volatile stocks may present lucrative opportunities, intraday trading inherently carries risks. A thorough understanding of the stock or sector is essential before engaging in such trades. Implementing stop-loss orders is crucial to manage risk. This mechanism automatically exits the position when the stock price reaches the predefined stop-loss level, preventing significant losses.
Identifying correlated stocks
One fundamental intraday trading approach involves investing in stocks closely aligned with an index or sector. The performance of the broader index or sector serves as a reliable indicator of market trends, facilitating profit generation. The NSE platform offers tools to analyse sector performance, enabling the selection of stocks exhibiting upward or downward trends. The correlation between the stock price and the index or sector simplifies trading decisions.
Prioritising transparent companies
Investing in companies that disclose comprehensive information about their operations is generally prudent. Access to relevant data aids in informed decision-making. Conversely, a lack of transparency can lead to erroneous judgments and losses. For intraday trading, focusing on companies with clear business practices is recommended. Additionally, considering the stability of the management team is crucial.
Recognising news-sensitive stocks
Selecting stocks that react to news is a common intraday trading strategy. These stocks often exhibit price movements in response to positive or negative news. Understanding these news-driven fluctuations can enhance trading effectiveness. However, excessive caution is warranted when dealing with highly news-sensitive stocks. Unexpected price movements can occur, even in the face of positive news.
Intraday trading rules
If you are a beginner to intraday trading, it helps to set some ground rules that you can use as a benchmark for your trades. This will help you make the most of the best intraday trading strategies, maximise your profits and limit your losses. Some helpful intraday trading rules you can follow are outlined below.
- Have a detailed trading strategy that you can follow.
- Conduct thorough research to identify stocks that offer good intraday trading opportunities.
- Refrain from infusing more capital than you can afford to lose.
- Ideally, choose stocks that are very liquid and have narrow bid-ask spreads.
- Close all your open positions to avoid automatic squaring off.
Conclusion
Intraday trading can be profitable, but it's vital to understand your strategy well before using it to make money. Keep up with stock market news and watch market trends closely. This helps you make smart decisions at the right times, boosting your chances of success in the fast world of intraday trading.
