We understand intraday trading as the initiation and closure of positions on the same day. You can either buy the stock and sell it by the end of the day or you can even sell the stock and buy back the stocks by the end of the day. In either case, there is no delivery of stocks as the net position is zero. However, the profits or losses on these intraday trades will get credited or debited to your trading account But, have you ever wondered about the pros and cons of intraday trading? Just as there are some clear advantages of intraday trading, there are surely some challenges too. Here is a look at the advantages and disadvantages of intraday trading.
What are the advantages and disadvantages of intraday trading?
The unique feature of intraday trading is that you hold the position for less than 6 hours since that is the time you have at your disposal for closing the intraday trade. In an intraday trade, the trader opens and closes a position on the same day. Intraday trading is a multi-faceted game as It requires discipline, skill, risk management, and guts. It also needs speed so you catch speed and can enter and exit at profit.
Let us start by looking at some of the pros and cons of intraday trading in slightly more elaborate detail.
Let us first look at the advantages of intraday trading.
- You don’t need as much capital as you would require in delivery trading since in intraday trading you only pay a margin and trade in the stock exchange.
- Since you trade on margins, your profits can get magnified. For example, if you have a margin of 6 times, then a profit of Rs.100 becomes a profit of Rs.600.
- Intraday trading has a unique feature in that it can work both ways. You can profit from intraday trading by either trading long on the stock or short on the stock.
- In India, short selling is not easy and is expensive and difficult. In intraday, you can even sell short and buy it back by evening, so you can use a negative view on stock effectively.
- On paper, intraday trading looks risky but in reality, you trade with stop losses and profit targets so your risk is automatically reduced in terms of maximum losses that can happen.
- Intraday trading is like borrowing from the market without paying any interest and to that extent, it is much better than margin funding.
- If you get a few intraday trades right, you can make big profits in intraday trading. But remember that this magnifying effect can work for you and against you also.
Let us now turn to some of the disadvantages of intraday trading.
- Your time window in intraday trading is only about 5-6 hours. If you don’t get the required moment in that time, you must close out the position.
- As we mentioned earlier, leverage in intraday trading can work both ways. Just as profits can get magnified and multiplied, the same is true of losses also. If you are a full-time intraday trader, then your cash flow risk is also quite high.
- Markets have their way of deceiving trades and this is more so for intraday trading. You may get enticed by a few correct trades and could end up losing capital in aggression.
- Intraday trading is largely a disciplined game. The day you are lax in discipline and risk management even for a few moments, your intraday trading performance can be in serious trouble.
- There is a lot of serious effort to put in. You need to become a good analyst, a good chart interpreter, and even a good trader. Wearing all these hats and playing all these roles, day in and day out can be quite demanding.
- Sudden bouts of volatility can work against you in most cases and can magnify your losses to unmanageable levels. Be cautious about that, as 1 or 2 bad days are enough.
- In an attempt to enter and exit positions hurriedly in intraday trading, you may lose out on long-term opportunities to make profits. Your room for error is too low if you are an intraday trader.
What is intrinsic value?
An important aspect of the fundamental analysis of stocks is intrinsic value. What is this concept? Intrinsic value refers to an objective value expressed in rupee terms for the company, based on factors like future cash flows, asset value, brand value, and other intangibles. Intrinsic value is nothing firm and is open to interpretations. Two analysts can look at the same company and arrive at two different intrinsic values for the business.
It is useful because you normally buy stocks where the market price is well below the intrinsic value of the stock. This gap is called the margin of safety. Similarly, you lighten positions on stocks where the market price is well above the intrinsic value as it is a sign of stock price froth.
How to read technical charts?
Here are four steps to read technical charts and patterns.
- First, identify the stock and then identify the specific indicator you want to track like moving averages, PFC, etc. You must use the correct symbol while looking for the charts of the company.
- Your time window will depend on whether you are looking at very short-term trends, short period trends, or longer trends. You have options like weekly charges, daily charts, minute-by-minute charts, tick-by-tick charts, annual charts, etc.
- The third step is to track prices and volumes. They are both critical. Price patterns show you the direction of the price but prices do not show you conviction in the move. That is only shown by the volumes traded on the stock.
- Finally, focus on moving averages like DME, SMA, EMA, etc. That is a key tool in stock analysis. In charts, patterns are normally indicated by price lines cutting across the moving averages. It identifies trend patterns and gives signals to trade.
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Frequently Asked Questions Expand All
What is overnight risk?
Overnight risk is the risk of holding the long or short position overnight. A lot can happen in international markets overnight which can change the opening price performance of the stock you hold the next day.
What is technical analysis?
It is the identification and interpretation of chart patterns to extrapolate future price moves. Technical analysis is based on the premise that patterns repeat and so you can use old patterns and extrapolate them into the future.
What is the minimum capital required to start intraday trading?
There is nothing like minimum capital. But you must start off with at least Rs.1 lakh and keep another Rs.1 lakh as standby for intraday trading. Most important thing is managing your risk in intraday trading.
