Intraday Trading is an alluring idea for traders to make quick money in stock markets. After all,who would not be interested in making some quick bucks in a matter of minutes or hours.So,it is quiet popular in a section of traders.Intraday trading or day trading, as the name is explanatory,is the process of taking long or short position in markets and squaring off ( exiting) that position before the close of the market on the same day.Intraday traders take the advantage of the movement in the price of the stock or the index during the trading session.Movement can be small or significant.
So intraday traders take position in large quantities of a stock so that a small movement in the stock provides big gains.Taking a large quantity of stocks and squaring off the positions after the stock takes a small move in the favorable direction,is called Scalping.Scalpers take several trades during the day so that at the end of the day,the profits are significant.
Now,what is the formula or technique for day trading -
Ofcourse,there are some formulas which are popular among the intraday traders like Pivot Point Formula or Fraction Theory which are commonly used to take a lead in initiating a trade.But intraday trading is not all about using formulas.When you are there in the middle,it is totally different ball game altogether.
We shall explain here the above said formulas but the other things which are very important and need to be taken care of are-
-Having a proper Mindset and Psychology-Doing a trade for fun or hobby can be dangerous.Your approach should be very professional.You should be aware that you are risking your hard earned money and the risk starts the moment you enter the trade.So be sincere.
-Control over the Emotions-Emotions like greed and fear are the enemies of a trader.Markets don't stand at a place.They keep on moving,up or down.So,don't let the fear take you for ride if markets move in the opposite direction of what you were anticipating.You should be aware of your exit point in such case.On the other hand if trade starts turning profitable,exit the trade at the level you were expecting before taking the trade.
-Having a plan-This is also very important part of trading in stock markets.You should be clear of the entry level,target level and stoploss of the particular stock which you are trading in.These levels are determined on the basis of technical analysis and the formulas.You need to stick to your plan to be successful.Writing the plan on a paper is a good idea so that you don't get swayed away by the market when you are in.
Without any of these,it is going to be very tough.
Now,let's take the formulae useful in intraday trading-
1.Pivot Point Theory- Taking previous day's trading prices of a stock,we can calculate the support and resistance levels for that stock for the next day.Support and Resistance terms are self explanatory.A stock which is moving higher,may stop at resistance level and come back.Similarly,a stock moving lower,may stop at support level and reverse its move.After crossing first support or resistance level,stock is expected to move to next support or resistance level.
Coming to the Pivot Point Formula,we select a stock where we want to trade intraday.For that stock,we need its previous day data- Intraday high price it touched ( H), intraday low price it touched ( L) and the previous day closing price ( C) for that stock.
Add theses three values- H+L+C=X.
Divide the total value by 3 :- X/3.
Multiply it by 2 :- X/3*2=Y
This value Y is called the Pivot Point.Stock sustaining above Pivot Point is likely to move higher towards first resistance level and above that towards second resistance level.If stock continues to trade below the Pivot Point,it is likely to move towards first support level and after that towards second support level.
Now,let's find resistance and support levels.
First resistance level ( R1) = It is the difference between the Pivot Point and the Intraday Low price.
R1= Y-L
R2=Y+( H-L)
First support level ( S1) = it is the difference between the Pivot Point and the Intraday High price.
S1= Y-H
S2= Y-(H-L).
2. Fraction Theory :- This theory is also based on previous day price movments of a stock.
Add up high (H),low(L) and closing (C) price of previous day of the stock and multiply it by 0.67 (ratio of 2:3 as in pivot theory and it is constant)
(H+L+C)* 0.67=Y
Resistance (R1)= Y-L
Support (S1)= Y-H
Possible Buy (P.B.)= Y-C
Above possible buy (P.B.),buy the stock for resistance levels.
So,in this way we can calculate important levels for any stock or index to predict next day's price movements.It advisable not to rely solely on these levels for intraday trading but should be used along with technical analysis based on short-term charts for stock to reap great
Some rules to follow while doing intraday trading:-
1. Use surplus money - Trading should be done only with the spare money,the money you don't need and can afford to loose.Trading,although very profitable,is associated with substantial risk.
2. Do proper research - Before taking trade,proper research should be done about the stock or the index ,using charts based technical analysis.It helps in determining important levels of the stock,strength and trend of the stock.
3. Use of Stoploss - This is very important part of any kind of trading.Most of the traders don't use it,knowingly or unknowingly and end up taking huge losses.Stoploss helps cutting short the losses and keeping emotions out of trading thereby protecting capital.Remember,capital protection is more important than earning profits.Profit earning opportunities keep on arising in the markets which you can use if keep your capital protected.
4. Don't overtrade - Overtrading is suicidal.More trades become difficult to manage.So trade only that quantity you are comfortable with.Keep number of trades limited to 2-3.If one trade gave you sufficient profit,better close the system and do some other work or relax.
5. Be disciplined - This is the major quality of the successful traders.Avoiding overtading,not fighting against the trend and cutting short losses and keeping fear and greed emotions out of the trading are some important steps.
6. Follow the Trend - To have a higher success rate in Intraday Trading,always remember 'Trend is your Friend'.So,always follow the trend and trade in that direction only.In up trending markets,select stocks which are strong on charts and have long positions.In down trending markets,select the weaker stocks and short them.Never trade against the trend.The advantage of trading with the trend is that even if you take a wrong call,you will not suffer big losses.
7. Liquidity - Always try to trade in highly liquid stocks.Liquidity is the volume of shares traded.In liquid stocks,it is easy to enter and exit the trade and you start or exit the trade near the last traded price.
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- Profit taking - This is also equally important.Take your profits and get out of the market when your target are achieved.Letting the profits run beyond targets leads to greed which is dangerous for trading.You never know when the market will turn around and throw you in losses after eating all the profit.Cutting losses is also important part of successful trading.Exit your postion if market is not going the way you ancipated.Don't be stubborn and let the market do what it wants to do.
I hope this article will be of immense help to those who are interested in trading.Queries and suggestions are welcome if anyone has any.
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