Best Intraday Trading Strategies: What should you know

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best strategy for intraday trading

Best Intraday Trading Strategies: Introduction

Investors enter the stock market with two of the following intentions- they either invest their capital in companies that they are expecting to give exponential gains in the long run and do not trade the stocks on a regular basis, known as stock market investing, or they shall invest their money and trade it on a daily basis to take advantage of the corrections and short term changes in the prices. The second kind of investor is involved in what is known as intraday trading.

In contrast to investing in the stock market in the long run, brokers may allow short selling in the short term. This enables the traders to sell a particular stock before even buying it and then buying it back within a stipulated time. Intraday traders use this to sell a stock when the price is high and then buy it within a stipulated time period when the price goes low, therefore betting on the chance of the price of a stock falling. An investor can also choose to simplify the intraday trading shenanigans by putting their best bet into the shares they want to buy/sell and square it off at the end of the day. 

While there are various strategies that are put into use by experienced traders in order to analyze and recognize patterns in the movement of a particular stock. As compared to investing, intraday trading is riskier, therefore it is crucial for a beginner to understand the basics of trading to avoid losses. This is where strategies can help.

Basic Rules for Intraday Trading

There are some basic set of generally accepted rules laid out by experts to help investors avoid losses while investing in the stock market:

  1. Experts believe that the timing of entering a trade is very crucial. It is recommended that traders should take positions between noon and 1 PM to increase the chance of profits and should avoid entering trades during the first few hours of the market opening to steer clear of the volatility during the initial hours
  2. Novice intraday traders tend to get carried away with the success of their trades and tend to put huge sums of money into their trades. The market is volatile and even experienced professionals are unable to rightly predict the market at all times. Hence, it is recommended that traders should invest small amounts of capital into the trades.
  3. Before an individual enters into intraday trading, they should be clear with the basics of fundamental and technical analysis in order to predict the price movements objectively. Research is a crucial part of their trading strategy as it gives the traders an advantage.
  4. Set your targets before you enter your trades, this will help you stick to the plan and exit trades at the right time, avoiding unrealistic expectations. Another, an important strategy is to set stop losses, in case the prediction starts to go south, you are able to cut back on your losses and exit the trade on time.
  5. In case the targets are not met, traders are tempted to hold onto their positions and get delivery of their stocks, this is strongly disapproved, exit positions on day closing is recommended even if it means taking losses.

Best Intraday Trading Strategies

Experienced traders are used to identifying patterns within the price movements of a stock. Certain patterns or implications are hints toward a particular prediction of the price movement. Key features of the strategies include, objectivity, consistent results, and based upon quantifiable and verifiable market information. Some of the commonly accepted and popular intraday strategies are:

Momentum Trading Strategy

The Momentum strategy is based on the idea that if there is enough force behind a particular stock movement, it is likely that the movement will continue in the same direction. When a particular share experiences a strong change in price it draws the attention of the traders and hence, is further pushed to move in the very same direction. This movement continues until a large number of sellers enter the market. These sellers, when in enough numbers change the direction of the movement and force the price of the asset to decrease.

The momentum of a price movement is evaluated based on three factors, volume, volatility, and time frame. Volume is the quantity of the assets that are traded during a particular time frame. The volume is important because it affects the ability of the trader to sell the asset in the market; i.e, liquidity. The volatility determines the degree of price changes in the market. The duration of the time period depends upon how long the price movement continues to move in the anticipated direction.

Gap and Go Trading Strategy

Although experts recommend avoiding volatility during the opening hours of the market, the Gap and Go Strategy relies on the very volatility during the first few hours of the market opening. It functions on the concept that if the market opens at a price that is at a gap from the previous closing price, then it is likely that the price will move further in the same direction. There is some fundamental reason backing this type of movement of the price, traders search for this reason (news, earnings, PR, etc.) to confirm their prediction. These gaps arise as an effect of the trading behaviors of investors during the pre-opening trading sessions. The strategy identifies large volumes of trades during the pre-market sessions and predicts the movement of the price.

Reversal Trading Strategy

The Reversal Trading Strategy is also known as the Pullback Trading Strategy or the Mean Reversion Trading Strategy. This strategy involves trading on a stock anticipating a reversal in the trending price movement. The trader bets against the price trends of a particular stock. For example, the prediction of the price of a previously surging stock going down after the reversal. The trader takes a position at a support level; i.e, the low level at which the price of a stock generally stops from going down further in its price trends. Traders are on the lookout to identify stocks at extreme ends of the market; i.e, at new highs or new lows. As soon as the trader recognizes a reversal in the movement, they enter the trade. Traders try to stay as close to the support levels as possible to ensure higher profits.

Moving Average Crossover Strategy

The strategy involves taking into consideration two moving average indicators, one being for a shorter term than the other. It seeks to identify a point where the shorter-term moving average curve crosses over the longer-term moving average curve. This event can indicate that the price trend that had been continuing for a long period of time is about to change in the direction of the shorter-term moving average curve. This system has given names to the type of crossovers, like the Golden Cross, where the longer-term curve is crossed by the shorter-term curve from below and the Death Cross, where the longer-term curve is crossed by the shorter-term curve from above. These crosses indicate that a particular stock trend has ended, or a reversal in the trend has been initiated.

Breakout Trading Strategy

Under this strategy the trader looks for support and resistance levels; i.e, price levels below or above which the price of the stock does not generally move respectively. They then wait for the price to move out of these levels and enter the trade when it does, in anticipation that it would go further in the same direction. A breakout is when the price of the stock moves out of these levels. Traders use trendlines and horizontal lines to ascertain these levels and trade based upon them. These levels generally fall upon rounded-out figures of price, for example, the Rs. 20 price point is much more likely to be a support or resistance level as compared to Rs. 22.

Don'ts of Intraday Trading

A new entrant while initially getting into the stock market may get carried away with the profits that they start making initially, and could lead to making mistakes in the long run. A few things that a novice investor must keep in mind while entering intraday trading:

  1. One should ensure that they are considering the market conditions before analyzing a particular stock. It may happen that certain indicators may be the result of a general change in the market, hence, the prediction being inaccurate.
  2. Traders might take up an emotional stance with a particular stock for various personal reasons and might make the wrong predictions thereof. Hence it is crucial to analyze stocks objectively.
  3. Not taking into consideration fundamental analysis, even though a trend might indicate something, a news update about their earnings will have a larger impact on the price. Therefore, investors need to be wary of this fact.

Important things to remember:

1. Do Not Blindly Follow Hot Tips

No matter how credible the source is, never follow a stock marketing tip blindly without conducting thorough research personally. Always select the stocks after doing proper research and analysis on the performance as well as the companies. While some tips can work out to give you huge benefits, the wrong ones can push you down under the risk pretty quickly. 

2. Eliminate Loser Stocks from Portfolio 

There is absolutely no guarantee that a stock will rise after a great fall. Know that it is extremely important to be practical about what is possible and what's impossible in the stock market. So, upon realizing that a stock is performing poorly in your portfolio, accept your mistake and sell it immediately to prevent further losses. 

3. Don't Exceed Your Investment Budget Abruptly 

While it's true that long-term investments are way better than other forms of investment, you shouldn't exceed your investment budget in a haste. Instead, decide on a fixed amount and invest it across various good stocks. Rather than investing in only one stock, divide your budget evenly across multiple good-performing stocks and shares. 

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