At the core of intraday trading is when and how to enter and exit stocks. Practically, it is not consistently possible to buy low and sell high; this only exists on paper. What is required is an understanding of trends and the ability to make the best of it.
Here are seven key rules on how to make the best of entry and exit in intraday trading. As Euclid once said, “There is no royal road to Geometry”, similarly, there is no royal road to being great at intraday trading either.
From among the many factors that are behind successful intraday trading, let us take a look at the entry and exit strategies in greater detail.
Seven commandments for entry and exit in intraday trading…
- Never enter an intraday trade without a stop loss. Stop losses are required in most trades but are an absolute must in intraday trading. Don’t try to become an investor by default; rather, stay an intraday trader by design.
- In the absence of stop losses, you may end up holding positions with unmanageable M2M losses. We are not just talking about identifying the stop loss levels but you must also input the stop loss as part of your buy or sell order.
- Just like you must not get into an intraday trade without a stop loss, don’t enter a trade without a profit target. Of course, you need to have a clear ratio of rewards to risk. A rewards/risk ratio of 3:1 or 2.5:1 is understandable. But a ratio of 1:1 is not viable.
- Decide your profit target based on the risk-return trade-off and input the profit target at the time of placing the order also. In fact, if you can use cover orders and bracket orders in intraday trading, you get greater leverage and you can put your capital to better use.
- One of the basic rules of entry is to avoid averaging your positions. It is quite common of rookie investors to buy more of a stock when it corrects.
- Averaging is wrong for two reasons. Firstly, you run the risk of being wrong twice. Secondly, you might increase your exposure to a particular volatility or downtrend more than warranted as it could put your capital at a greater risk.
- There is another side to this story. If something is too good to be true, then it probably is. This is especially true if your position yields attractive profits within the first hour. Don’t ride your luck for too long. Just take your profits and walk out.
- Learn to identify trends and always trade on the side of momentum. The trend is your friend in intraday trading. Don’t try to outsmart the market. The market trend always tells you a story and you must listen to it. Intraday trading is all about being on the right side of momentum. If the underlying trend is strong, then don’t try to short the market. You can either buy for momentum or buy on dips. This is where an intraday trader has to think differently from an investor.
- Entry and exit is all about charts, news, and data. Learn to interpret charts. It might seem complex at first, but it is not rocket science either! You must know the basics of supports, resistances, moving averages, stochastic, etc.
- Keep a tab on the news; otherwise, you are likely to fail as an intraday trader. Evaluate the impact of news and macros. Evaluate the flow of corporate actions and results announcements. All these are useful inputs if you want to be an informed intraday trader. Also, F&O data points like open interest, option strike accumulation, IVs, and Put-Call Ratios are all important indicators for intraday trading.
- Beware the overnight risk in intraday trading. Profits and losses are part of the game, but the overnight risk is in your hands, so stick to your knitting. Carrying positions overnight has two risks. You run the overnight risk as a lot can change in 12 hours. Secondly, your intraday trading capital may not be equipped to take on that kind of risk.
- At times, the most profitable decision in intraday trading may be to sit on the sidelines. However, you must develop the wisdom to identify the days you should do this. Don’t trade in the midst of a volatile market. Intraday trading is best done when the direction and momentum of the market are predictable. The biggest error in intraday trading is when you don’t understand the underlying trend of the market and spend more time and capital triggering stop losses.
Entry and exit in intraday trading is, of course, about charts and market volumes. But it is also a lot about discipline. Get your intraday trading discipline in place first!