With an easy access to technology and internet, lot of people are getting fascinated towards stock & commodity trading. For any trader it’s very important to go through the intraday trading basics as well as some of the best practices of trade management.
Since intraday trading looks very lucrative proposition who doesn’t want to try hands at it to make some quick money!
Nothing is as easy as it seems – But we can very well make it easier by taking care of basics of day trading.
Let me discuss some important intraday trading basics that you can’t afford to ignore.
If you are really serious about succeeding in intraday trading whether it’s stocks, commodities or currencies – you got to work on these basic elements.
Intraday Trading Basics Point 1 – Get mentally prepared to take it as a pure Business:
Intraday trading is just like any other business. Whether you are doing trading as a part time activity or full time activity, you got to remember – it’s a plain business.
When you are operating a business, you need to have a proper business plan – here we call it a trading plan. Fix it into your mind. Align the trading plan with your lifestyle.
You should have a properly laid out routine for daily trade:
Like when you will be trading (timezones). For how much time you will be into any particular trade etc.
You got to prepare a trading plan based on whatever technical indicators you want to use.
There is no need of fundamental analysis in intraday trading.
Intraday Trading Basics Point 2 – Get a Proper strategy to Pick right Stocks for the day:
Picking right stock is the biggest problem faced by any intraday trader.
If your strategy allows you to pick/select right stocks for day trading along with the right trend, then 80% of your job is done. Rest 20% is trade management.
There are only two things to focus on for intraday trading – Technical Analysis & Sentimental Analysis.
“Sentimental Analysis” is all about checking the overall/broader market sentiment on the given day.
Whether the overall market is in up-trend, down-trend or moving sideways. Whether any news/event affecting the markets.
What is Technical Analysis?
Technical Analysis is the study of price, volume or combination of both over a period of time to predict future movement in prices of Stocks/commodities/currencies.
There are lots of technical indicators that traders use to predict/speculate on futures prices based on historic chart patterns.
These technical indicators are further categorized as leading indicators (Eg: Relative Strength Index (RSI), Stochastics, Parabolic SAR) and lagging indicators (Eg: Exponential Moving Averages, MACD, Bollinger Bands etc ).
These indicators use price, volume data fed on a platform over a period of time (called time frame) to give indication of Buy & Sell signal.
General time frame used by traders are 1 minutes, 3 minutes, 5 minutes, 15 minutes, daily etc.
Almost 90% of the technical indicators that traders currently use fall under lagging indicators.
Any single technical indicator by itself is not sufficient to given clear indication of future movement of stock prices.
A pure Price action based strategy is the best one to determine the trend or direction of a particular stock.
Once a Trend is determined one can use combination of leading and lagging indicators to confirm the strength of the trend. This will save you from false signals as well as help in deciding the Targets for the trade.
Use of multiple technical indicators will increase confusion and complicate the things.
Suggestion: Learn a Price action based strategy to pick stocks for trading and to determine trade set-ups. Use just 1 or 2 technical indicators to confirm strength of the trend.
That’s how you can keep your trading system simple and effective.
Intraday Trading Basics Point 3 – Be a disciplined trader & Respect your Stoploss:
After picking the stock for a trade, the next important step in your trade management rule book should be determining stoploss and target for the trade set-up.
I always give more importance to stoploss than a target.
Because if you don’t respect your stoploss – the trade will not respect you.
Most traders forget that once they are into an intraday trade – they have to close the trade by the end of the day.
Whatever may be the situation –
A. Stoploss is hit
B. Target is Hit.
C. Stoploss is not hit, we are in loss but market is closing
D. Target is not hit. we are in minor profit but market is closing.
An intraday trade is meant for INTRADAY only.
No matter what if we have decided to enter trade with objective of intraday trading then position needs to be closed by the end of the day.
There is no place for emotions in trade management rules.
When it comes to trading, remember:
1. Trend is the King – Follow it
2. Stoploss is the Queen – Respect it
3. Emotions are the biggest enemies – Kill it.
Intraday Trading Basics Point 4 – Preparing for the day trading:
You should never enter a trade without a trading plan:
Plan your trade and trade your plan!
Preparation of Day trading starts a night before the day you intend to trade.
Even for day trading, you should be ready with watchlist of stocks that you would be trading for the day.
The stocks should be properly selected based on the trading system or technical analysis that you are comfortable with.
Every evening/night you should scan the stocks and prepare a watchlist of stocks for next day’s trade.
Whatever technical analysis and indicators you are using, scan and select stocks based on it.
Once the stocks are selected and added to watchlist – Prepare proper trade set-up for them.
Decide right entry prices, Stoploss and Targets for the intended trades.
Intraday Trading Basics Point 5 – Relax and be willing to learn a thing or two from markets:
Stock market is the biggest teacher for any trader.
One should be willing to learn from own trading experiences and also be quick to implement the lessons in your day trading strategy.
Continue to tweak/improvise/customize your trading system as per your personal needs and objective – till you find a right combination of accuracy and risk-reward ratio.
Additional note for Beginners in trading: Don’t worry about which segments to trade in – Cash, Options or Futures.
First thing is to learn “art of stock picking and determining trade set-ups”. Where and how to trade comes later.
It’s like swimming. One should first focus on learning to swim. Whether to swim in pool, river or a sea comes later. Once you learn proper skills to swim – you can swim anywhere.
Share your thoughts & trading experiences in the comment section below.