Intraday trading is a technique that involves buying and selling stocks or assets on the same day. Since all trading is closed on the same day, there are no transaction costs or deliveries involved. This type of trading has several benefits and risks compared to other trade options.
If someone wants to make profits through intraday trading, they need to be prompt and risk-tolerant while dealing with transactions and working around the market on the same day.
It is a very plan-oriented trading method where one needs to understand risk management in intraday trading, be practical about their decisions, and regulate their wealth exposure.
Intraday trading
The buying and selling of stocks within the same day is called intraday or day trading. This is typically done using online trading platforms during trading hours. If you want to engage in intraday trading, you only need to select that option on the platform. This allows you to buy and sell the same number of stocks of a particular company on the same day before the market closes. Intraday trading aims to earn profits from the movement of market indices.
The stock market can provide great returns for long-term investors, but intraday trading can help you earn profits in the short term, considering you understand risk management in intraday trading first.
Let us understand how intraday trading works with an example. If a stock opens trading at Rs. 500 in the morning and rapidly climbs to Rs. 550 within an hour or two, an individual who had purchased 1,000 stocks in the morning and sold them at Rs. 550 would have made a profit of Rs. 50,000 (Rs. 5,50,000 - Rs. 5,00,000) — all within a few hours. This is what intraday trading offers to an investor.
Risk management in intraday trading
Traders must have a clear understanding of intraday risk management to operate successfully in the market. Intraday trading can feel like a risky game since it involves predicting market fluctuations and assessing investment risks, which only become apparent at the end of the day.
Therefore, minimising risks is crucial. Traders must develop a strategy before the market opens and adhere to it throughout the day to avoid being emotionally swayed into making impulsive decisions while trading.
Also read: Intraday trading time
Risk management techniques
There are four commonly used intraday risk management techniques: stop loss, position sizing, resistance and support levels, and trailing stop loss. These practices help minimise risk and maximise profits for an investor. However, it is important to note that the market is highly volatile, and no technique can guarantee any profits or losses.
Here is a closer look at the above-mentioned intraday risk management techniques.
Stop loss
A stop-loss trade, which is highly common and effective, involves setting a limit order below your purchase price. Now, if the stock moves downward and reaches the set price level, the trade will get triggered and stop you from incurring further losses.
Position sizing
The tradable dollar amount or the size of a position within an investor's portfolio is called position sizing. This method will help you decide the number of units to purchase. It basically determines how much trading capital you can risk on each trade to control risks and avoid losses.
Resistance and support levels
Resistance and support information help you understand risks and select accurate entry and exit points for your day trading. A resistance level is a level above which a stock does not rise, while a support level is the opposite—It is a level below which a stock does not fall. These levels help with risk management in intraday trading and setting expectations for the trade.
Trailing stop loss
This technique helps you protect your profits and gains. It is another form of stop loss that allows investors to set a specific price or percentage of loss on their trading. You can place a trailing stop loss order at your desired price, which must be below the ongoing market value. Your stop loss will now trail behind your investment as it keeps moving ahead.
Suddenly, if there is a reversal in the asset's direction, the trail will get triggered to limit any losses and realise your gains.
Tips for risk management in intraday trading
Here are some helpful tips for risk management in intraday trading:
- Research: Luck is not a reliable factor while engaging in intraday trading. Before entering this volatile market, research well and know your way around day trading to minimise losses and maximise profits.
- Volatile stocks: Avoid risky stocks in intraday trading. Considering trades are closed within the same day, it can be risky to opt for unstable stocks because you can lose a lot more than planned.
- Trends: Opting for stable stocks also means you are tracking the market trend and not taking big risks. It is always safer to go with the herd while engaging in intraday trading.
Also read: Intraday trading indicators
Conclusion
Risk management in intraday trading is an essential aspect of effective trading. Although it can help reduce the risk, it cannot completely avoid it. Intraday trading is considered risky because the market is highly volatile. Therefore, it is crucial to assess the risks and market conditions and adopt a plan-oriented approach when engaging in this form of trading.
While it is possible to reduce risks or develop effective strategies, it is important to manage expectations since it is inevitable to experience losses at times. It is also crucial to remember that while profits can be high, setbacks can occur in this type of trading.
