Intraday trading or day trading refers to buying and selling financial instruments on the same day (or trading session). Day trading is done solely to make quick profits. It is a high-reward and high-risk form of stock trading.
This blog provides insights into some of the best tools for intraday trading for beginners.
What is intraday trading?
Intraday trading involves entering and exiting a trading position within a single trading session. Traders try to benefit from small price moves and make quick profits. Day trading positions are closed before the trading session ends, which protects the traders from the overnight risk of holding stocks.
Now, let us look at some intraday trading tools and techniques that beginners can use to start their learning journey for becoming intraday traders.
An interesting read: Intraday Trading Explained: How It Works and Its Benefits
Intraday trading tools
Here are some important tools for intraday trading that a beginner trader should know:
- Stock selection: Beginners must first learn to select the right stocks for intraday trading. If this process is not done properly, then traders can execute positions in stocks that have low liquidity or are financially unstable companies. This can significantly increase their risk.
Traders can use intraday trading tools like stock screeners to filter for stable stocks for intraday trading. This stock selection can be based on the company’s market capitalization, liquidity of the stock, and other factors.
- Price action: Price action helps traders understand the mood of the markets on the basis of changes in prices. Key price action basics that beginners can focus on learning are:
- Candlestick patterns: Patterns formed by candlesticks that provide insights into short-term price action. For example, doji, hammer, etc.
- Chart patterns: Chart patterns are formations on price charts that indicate the possibility of trend continuation or reversal. For example, heads and shoulders, triangle patterns, etc.
- Trends: Trend is the direction in which the stock prices are headed. Gauging the trend is a key step in price action analysis.
- Support/resistance levels: Support levels indicate price points where a large number of buyers are present, and they absorb all the supply and do not let the prices fall below that level, and resistance is the level with huge numbers of sellers present.
- Breakouts: Breakouts are price moves beyond key support and resistance levels. These can indicate significant buying or selling pressure.
Beginners can use intraday trading tools like free charting software for learning and observing price action in the markets.
- Trading indicators: Some traders consider trading indicators the best tools for intraday trading. Technical indicators can help traders understand different aspects of price movements like momentum, volatility, etc.
These indicators are used by traders for both confirmation of the price action and for generating trading signals. Traders also use volume, that is, the number of shares traded, to understand the strength of the price move.
For example, moving average convergence divergence, relative strength index, Bollinger bands, On-balance volume, etc.
- News and announcements: News about stocks and corporate announcements also act as key tools for intraday trading. Any significant news has the potential to move stock prices in either direction.
Beginners can use any financial news outlet to keep track of the latest happenings in the stock market and try to understand how it can affect the prices of financial assets.
Also read: Tips for Selecting Stocks for Intraday Trading
Intraday trading techniques
Here are some important techniques for intraday trading that a beginner trader should know:
- Trend following: Trend following refers to placing trade in line with the prevailing direction of prices (trend). This technique can be used for positional trading as well as for short-term intraday trading.
Some of the best tools for intraday trading using trend following are moving averages and trendlines.
- Breakout trading: Breakout trading refers to placing trades when the price moves above or below a major support or resistance level or if the price breaks from a chart pattern. This can indicate the presence of a large number of buyers or sellers that can potentially move the price in the direction of the current trend.
Traders can look for confirmation using volume or trading indicators to confirm the breakout moves.
- Mean revision: Mean revision trading is based on the idea that after extreme movements in price, it returns back to its average. Traders look for extreme price moves and bet against the moves, thinking that the price will return to its average.
Traders use moving averages or other statistical tools to find average prices. This method of intraday trading takes a lot of time to master.
- Gap trading: Gap occurs when the prices of a stock open today are significantly higher or lower than the high or low of the previous trading session. Gap traders try to understand whether the gap is because of strong buying or selling pressure or if prices will revert to fill the gap.
Gaps can provide important information about the mood of the markets.
Key consideration: Intraday trading
Beginner traders must consider these factors before venturing into day trading:
- Trading plan: Beginners must first learn and understand the markets and take their time to make a trading plan with clear rules for entry, exit, stop loss, and profit targets. This plan must be tested with virtual money or on historical data before putting into action using real money.
- Risk management: Traders should never forget about using proper risk management. This includes stop losses, position sizing, understanding reward to risk ratios of your trading strategy, etc. This can help in minimizing losses and reducing risk.
An interesting read: Assessing Risk Levels in Stock Investments
- Psychology: Intraday trading is a stressful form of trading. Trade emotions like greed and fear can lead them to make unwise decisions, leading to losses. Beginners must learn to control their emotions while trading. This is something that is learned with experience.
- Real expectations: Beginners in intraday trading often have unrealistic expectations. They believe that intraday trading is a get-rich-quick scheme. But in reality, intraday trading is a slow and systematic way of making money, just like other businesses.
Bottomline
Mastering intraday trading tools and techniques is a must for beginners looking to enter the world of intraday trading. By using the best tools for intraday trading, such as proper stock selection, price action analysis, trading indicators, etc, traders can make informed decisions.
Additionally, understanding key strategies like trend following and breakout trading, along with strong risk management, can ensure long-term profits. With the right tools for intraday trading and disciplined execution, traders can benefit from market opportunities and minimize risks.
FAQs
1. Is scalping a form of intraday trading?
Scalping refers to buying and holding shares for a few seconds before selling. Traders buy and sell huge quantities of shares for minimal profit, holding the trades for a few seconds. So, it can be categorized as intraday trading since buying and selling are taking place on the same day. But scalping is done by big institutions.
2. How much capital do a beginner need for intraday trading?
There is literally no limit to the minimum amount of money required for intraday trading. You can buy and sell a single share, but that is not practical since brokerage charges will cancel your gains if you trade just one share. It is practical for beginners to start trading with a sum of money that they can afford to risk.
3. Can you try intraday trading without risking real money?
Yes, you can use Stockgro’s virtual trading feature to try out intraday trading before you risk your real money. This will help you gain confidence and test your strategy in real markets. You will get to know the workings of the markets as a beginner and learn about the issues with your trading strategy, if any.
4. What is slippage in intraday trading?
Slippage happens when you place a trade, but it gets executed at a slightly different price because of fast market movements or low liquidity. It’s common in volatile stocks and stocks that are not liquid. To avoid it, use limit orders instead of market orders and trade in liquid stocks with tighter bid-ask spreads.
5. What is the reward to risk ratio in intraday trading?
The reward-to-risk ratio tells you how much reward you will be earning for every unit of risk being taken. For example, a trading position with a buying price of ₹1,800, a profit target of ₹2000, and a stop-loss level of ₹1700 will have a reward-to-risk ratio of 2:1. It is ideal to have a reward-to-risk ratio of 2:1 or 3:1 for each trade.
