How Does Intraday Trading Works

As the name suggests, intraday trading is all about initiating and closing out the trade on the same day. Here is how intraday trading works. The trader either buys and sells on the same day or sells and then buys back the stock on the same day. Intraday trading does not result in delivery because the net position at the end of the day is zero. Hence intraday trading does not impact your Demat account in any way.

To understand how intraday works, imagine that you want to play a small movement in the stock which you expect in the next 2 or 3 hours. Intraday has the advantage of having to pay lower margins so you can take larger positions with a smaller margin with the broker. Let us first know how intraday trading works in practice.

How does intraday trading operate?

Let us understand how intraday trading works in the Indian context. The basic idea here is to make the best of short-term rise and fall in the price of stocks in the market. You can apply this intraday trading logic to stocks and also to commodities, but now we will restrict our discussion only to stocks. On any day, the markets are volatile, which means they fluctuate both ways. The idea of intraday trading is that you capitalize on these small price movements and try to make small profits on the buy-side and the sell-side.

Here is how intraday works. Intraday traders are normally agnostic in the sense that they are open to buying and selling securities within a day. While there are no hard and fast rules, the general rule is to stick to stocks that have high liquidity and also keep fluctuating in response to stimuli. In intraday trading, you try to buy low and sell high or you try to sell high and then buy back low. That basic rule of trading remains the same.

How to put an intraday trade and how intraday trading works. When you place an intraday trade, you mention first that it is an MIS trade, which means same-day square-up. If you select CNC trade, then you will be asked to put up the entire purchase value upfront. If you select MIS order and place an intraday trade, then you can get the benefit of lower brokerage and also a higher margin. For example, you can get 4-5 times leverage intraday. That means; that with an investment of Rs.1 lakh, you can take positions of up to Rs.5 lakhs inequities.

Is intraday trading riskier?

It depends on how you look at it. For starters, in intraday trading, you only have about 5-6 hours to initiate and also close the position. Even in this period, the highest volatility and opportunities are found in the first hour and the last hour of trade with the intervening hours being largely lackluster on most of the day. If you don’t square the intraday position before around 3.15 pm, then the broker will run a check and square off the open position at the best price available. You must keep that in mind and hence close positions well before that time.

When you are an intraday trader, here are 5 key rules to follow.

  • You cannot trade intraday based on tips and forwards. You must study the stock, see how the charts look and how it reacts to news flows. Try intraday trading in small quantities first before taking large positions.
  • Always trade intraday with a stop loss to protect your risk. Also set profit targets when you trade intraday and respect stop losses. By putting stop losses, you can also get better leverage from your broker as it becomes a bracket order.
  • If you want to be an intraday trader, you must get familiar with technology, use smart screeners, smart excel sheets and use online trading tools or apps to trade. You cannot call up your broker and do intraday trading.
  • Costs matter a lot in intraday trading as you trade on wafer-thin margins. Take your time to find a good broker who gives a lot of add-on services and where brokerage is competitive. Cost-saving is important in intraday trading.
  • Maintain a trading diary. There is no royal route to intraday profits and you need to learn the ropes over some time. A trading diary records your decisions and helps you to take a dispassionate view of whether you are on the right track or not.

What is fundamental analysis?

Fundamental analysis is the science of understanding the worth of stock. For that, you need to evaluate the profitability of the company, its balance sheet, financial ratios, qualitative factors, etc. In fundamental analysis, you don’t believe too much in short-term trends. The logic is that if you have invested in a good business at a reasonable price, then you are going to be profitable and create wealth in the long run.

Advantages of delivery trading

Delivery trading has several advantages. It helps you buy stocks that are undervalued. It has been historically observed that stock prices will eventually gravitate towards the intrinsic value of the stock. Hence by delivery trading, you not only start building your wealth but also take steps to build your wealth in the long term through equity investing.

Frequently Asked Questions Expand All

For intraday trading select stocks that are liquid and widely held so that prices cannot be influenced by a few hands. Focus on stocks that react to news flows. Above all, ensure that when you trade intraday, you keep stop losses and profit targets and also manage your risk judiciously.

The Value Area is another name for the range of prices where a large majority of trading volume took place on the previous trading day. You can also express this in terms of numbers. For example, value area is the area or range where over 70% of the previous day's volume actually got executed. We are not talking about orders but actually trades executed. The value area is approximately one standard deviation above and below the average highest volume price. Again, these are not hard and fast rules but just approximations.

The statutory limits to intraday trading are put by the margin that you can bring into trade. However, as a trader, you must focus on maintaining tight stop losses, keeping your daily, weekly and overall risk in control. When you have made too many losses, just exit and take a fresh view. Intraday trading is a way of speculating the stock's price wherein buying and selling occur on the same day. Click here to know how intraday trading works at