What is Intraday Trading

Intraday trading has gained tremendous popularity among traders in recent years. It is a trading style where you buy and sell stocks within the same trading day. This means that all trading positions are squared off by the time the market closes, ensuring no overnight exposure. Intraday trading can be highly profitable if done correctly, but it requires a deep understanding of market trends, strategies, and the ability to make quick decisions.

Content

• What is Intraday Trading and How It Works?
• What is Intraday Trading with Example
• Intraday Trading Meaning
• What is Intraday Trading Investing?
• Intraday Trading for Beginners
• Intraday Trading Tips
• Learn Intraday Trading
• Intraday Trading Charges
• Basics of Intraday Trading
• Intraday Trading Rules
• Intraday Trading Time
• Tax on Intraday Trading
• Intraday Trading Benefits and Disadvantages
• Conclusion
• FAQs

What is Intraday Trading and How It Works?

Intraday trading involves buying and selling stocks or other financial instruments within a single day. The goal is to capitalise on short-term price fluctuations. Unlike long-term investors who hold positions for months or years, intraday traders aim to profit from small price movements throughout the day. Positions are closed by the end of the day to avoid any potential risks associated with overnight market volatility.

What is Intraday Trading with Example

Let’s take a simple example: Suppose you buy 100 shares of XYZ stock at ₹500 per share at 10:00 AM. Throughout the day, the price rises to ₹520. You sell the shares at ₹520 before the market closes at 3:30 PM. Your profit is the difference between the buying price and the selling price, which is ₹20 per share, totalling ₹2,000. However, remember that brokerage fees, taxes, and other transaction costs must also be considered.

Intraday Trading Meaning

Intraday trading, by its very nature, is time-sensitive. Unlike regular stock investing, where you hold onto your investments for long periods, intraday trading requires you to react quickly to market movements. Traders must be ready to buy and sell immediately, and all trades must be completed within the trading day.

What is Intraday Trading Investing?

Intraday trading is different from traditional investing. When you invest in stocks long-term, you’re banking on the company’s growth over several years. In contrast, intraday trading focuses on short-term price movements. It’s all about making quick profits from small fluctuations in the stock market rather than waiting for a company’s value to grow over time.

Intraday Trading for Beginners

Step 1: Understanding the Basic Concepts

Before diving into intraday trading, beginners should familiarize themselves with the stock market’s basic principles. This includes understanding how the market operates, the importance of liquidity, and how market trends affect stock prices.

Step 2: Selecting the Right Stocks

Choose highly liquid stocks, meaning they can be bought and sold quickly without significantly affecting the price. Volatility is also crucial, as more volatile stocks offer greater opportunities for price movement throughout the day.

Step 3: Setting Up a Trading Account

You’ll need to open a trading account with a broker. Ensure your chosen platform offers advanced charting tools and real-time data to help guide your intraday trading decisions.

Step 4: Using Technical Analysis

Intraday traders rely heavily on technical analysis, such as reading charts and identifying patterns. These patterns help predict potential price movements and give traders insight into when to buy or sell.

Intraday Trading Tips

Tip 1: Set Stop-Loss Limits

Stop-loss limits are essential in minimizing potential losses. By setting a stop-loss order, you automatically sell the stock if it drops to a certain price, preventing further losses.

Tip 2: Trade in Liquid Stocks

Only trade in stocks with high liquidity, as this ensures you can quickly enter or exit a trade without significant price changes.

Tip 3: Avoid Volatile Markets

Avoid trading in highly volatile markets unless you have a clear strategy. Volatility can lead to significant price swings, resulting in unexpected losses.

Tip 4: Practice Discipline

Discipline is key in intraday trading. Stick to your strategy and avoid making emotional decisions, which can often lead to mistakes.

Learn Intraday Trading

To master intraday trading, continuous learning is essential. There are numerous resources available, including:

• Books: Titles like “The Psychology of Trading” by Brett N. Steenbarger provide deep insights into the mental aspects of trading.
• Online Courses: Platforms such as Udemy and Coursera offer comprehensive courses that teach intraday trading basics and advanced strategies.
• Simulators: Trading simulators allow you to practice intraday trading with virtual money before committing real capital.

Intraday Trading Charges

Intraday trading involves certain costs that traders need to be aware of. While the profit potential can be high, these charges can eat into your earnings if not properly accounted for. Let’s break down the typical charges involved in intraday trading:

Brokerage Fees

When you execute a buy or sell order, brokers charge a fee known as the brokerage fee. This fee can be a flat rate or a percentage of the trade value, depending on the brokerage firm and the trading platform you use. In intraday trading, these charges can add up quickly since you’re making multiple trades within a day.

Securities Transaction Tax (STT)

STT is a government-imposed tax on the purchase and sale of securities. In the case of intraday trading, STT is levied only on the selling side. The STT rate may vary, but it’s crucial to factor this into your cost calculations, as it directly impacts your net profit.

Goods and Services Tax (GST)

GST is charged on the brokerage fee and other service charges. It is currently set at 18% in India. This tax is on the service provided by your broker, and while it might seem small, it can accumulate over time, especially for frequent traders.

Stamp Duty

Stamp duty is charged on the total value of the transaction. The rates may vary based on the state you’re trading from, but it’s a necessary cost for all trades, including intraday.

Transaction Charges

Stock exchanges like the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE) levy transaction charges on both the buying and selling of stocks. These fees are usually minimal but should be considered when calculating the total cost of a trade.

Exchange Transaction Charges

In addition to brokerage and government taxes, the stock exchanges (NSE/BSE) levied exchange transaction charges. These charges may differ between exchanges and are imposed on both buy and sell transactions.

Other Miscellaneous Charges

• Depository Participant (DP) Charges: These are charges associated with holding securities in a dematerialised form.
• Turnover Charges: These are applied to the total value of shares bought and sold during intraday trading.

How Charges Impact Profitability

All these charges—brokerage, taxes, and exchange fees—reduce your net profit from a trade. For example, if you profit from ₹1,000 on an intraday trade but incur ₹500 in various charges, your net profit will only be ₹500. Therefore, intraday traders must account for these costs when planning their trades, as even small fees can substantially impact overall profitability, especially if you’re executing multiple trades a day.

Basics of Intraday Trading

Intraday trading, as the name suggests, refers to buying and selling stocks within the same trading day. It focuses on short-term price movements, where traders aim to capitalize on market volatility. Let’s dive into the foundational elements of intraday trading:

Leverage

In intraday trading, leverage allows traders to borrow funds from their broker to increase their position size. This means you can control a larger amount of shares than what your actual capital allows. While leverage can amplify profits, it also increases the risk of losses, so it should be used cautiously.

Margin Trading

Margin trading is closely linked to leverage. Brokers offer traders a margin account, where they can trade with borrowed money based on the margin percentage set by the broker. For example, if your broker offers a 10% margin, you need only ₹10,000 to trade stocks worth ₹1,00,000. However, the risks here are high, as losses can exceed your initial capital if the trade goes wrong.

Stop-Loss Orders

A stop-loss order is a vital tool in intraday trading. It allows traders to set a predetermined price at which they will exit a losing trade to limit losses. For instance, if you buy a stock at ₹100 and set a stop-loss at ₹95, your position will automatically be closed if the stock price drops to ₹95, thus preventing further losses.

Entry and Exit Strategies

Having a clear entry and exit strategy is crucial for intraday traders. This involves deciding the price levels at which you will buy or sell stocks. Traders often use technical analysis, chart patterns, and indicators like moving averages and RSI (Relative Strength Index) to determine the best entry and exit points.

• Entry Strategy: Enter the trade when the stock shows favourable momentum or breaks a resistance level.
• Exit Strategy: Exit when your target profit is met or the stock hits your stop-loss level.

Market Orders vs. Limit Orders

In intraday trading, you can use either market or limit orders to execute trades:

• Market Orders: These are executed at the current market price, ensuring your trade is completed quickly but without control over the exact price.
• Limit Orders: You specify the price at which you want to buy or sell. The trade will only execute if the stock reaches that price, providing more control over your trade.

Risk Management

Risk management is a key aspect of successful intraday trading. Due to the fast-paced nature of intraday trading, prices can move rapidly in either direction. Effective risk management involves:

• Setting Stop-Losses: This helps limit potential losses.
• Position Sizing: Never risk more than a small percentage of your capital on a single trade, commonly 1-2% of your total trading capital.
• Diversification: Don’t put all your capital into one trade or sector. Spread your risk across different stocks or market segments.

Importance of Market Volatility

Intraday trading thrives on market volatility. High volatility means bigger price swings, providing more opportunities for traders to make quick profits. However, increased volatility also raises the risk of losses, so traders must balance opportunity and risk.

Time Frame

Time is a crucial factor in intraday trading. Traders typically operate on shorter time frames, such as 1-minute, 5-minute, or 15-minute charts. These charts provide real-time insights into price movements and help traders make quick decisions. Understanding the best trading times, often during the first and last hours of the trading day, can increase profitability.

Intraday Trading Rules

Intraday trading requires a solid understanding of certain rules and guidelines to be successful. These rules are designed to help traders manage risks, make informed decisions, and avoid unnecessary losses. Let’s explore the key intraday trading rules every trader should follow:

Complete Trades Within the Same Day

One of the fundamental rules of intraday trading is that all positions must be squared off (closed) before the market closes for the day. This means you need to buy and sell stocks on the same day, as intraday trading doesn’t carry positions overnight. Any positions left open by the end of the day may automatically be squared off by your broker, potentially at a loss.

Set Stop-Loss Limits

Setting a stop-loss is crucial in intraday trading to minimize losses if the trade moves against you. A stop-loss order automatically closes a trade when the stock price hits a predefined level. For example, if you bought a stock at ₹200 and set a stop-loss at ₹195, the trade will automatically close if the stock drops to ₹195, thus preventing further loss.

Trade in Liquid Stocks

Liquidity refers to how easily a stock can be bought or sold without significantly affecting its price. In intraday trading, it’s essential to trade in stocks with high liquidity to ensure you can quickly enter and exit positions. Stocks with low liquidity may experience larger price fluctuations, making it harder to sell at your desired price.

Avoid Emotional Trading

Emotions like fear and greed can cloud judgment and lead to poor trading decisions. Intraday traders must remain disciplined, stick to their trading plan, and not let emotions dictate their actions. Making decisions based on market trends and technical analysis, rather than instinct or panic, is key to success.

Use a Trading Plan

A well-defined trading plan should include your risk tolerance, trading strategy, entry/exit points, and target profit. Following a structured plan helps you stay disciplined and avoid impulsive decisions. Successful traders consistently use a plan that outlines their moves for each trade.

Avoid Trading During High Volatility Without a Plan

Market volatility can present opportunities, but it also increases the risk of sharp price movements. If you’re trading during highly volatile periods, such as during major economic announcements or market news, ensure you have a clear strategy in place. Avoid trading on speculation during these times unless you have carefully analyzed the market conditions.

Stick to Risk-Reward Ratios

Before entering any trade, determine the potential risk and reward. A typical risk-reward ratio in intraday trading is 1:2, meaning you are willing to risk ₹1 to make ₹2 in profit. This approach ensures that even if some trades result in losses, your overall gains can still be significant over time.

Monitor Market Trends

Stay updated with the latest market news, trends, and global events. Intraday traders need to be aware of factors influencing stock prices, such as economic data releases, company earnings reports, or geopolitical developments. Regularly monitoring the news helps traders anticipate market movements and make informed decisions.

Don’t Overtrade

Overtrading refers to executing too many trades daily, often driven by the excitement of quick gains. However, this can lead to increased transaction costs, higher risk exposure, and emotional fatigue. Focusing on quality trades with well-defined strategies is better than chasing multiple trades without proper analysis.

Maintain a Trading Journal

Keeping a record of your trades, including the reasons for entering and exiting, profit/loss, and your overall strategy, can help you learn from your mistakes and successes. Reviewing your trades periodically allows you to spot patterns and improve your trading strategies over time.

Follow Market Hours

In India, the stock market is open from 9:15 AM to 3:30 PM. Most of the trading activity happens during the first and last hour of the trading day. The middle part of the day often experiences lower volatility, which may offer fewer opportunities. It’s important to be aware of market hours and focus your trading efforts on the most active periods.

Avoid Holding on to Losing Positions

In intraday trading, it’s tempting to hold onto a losing position, hoping that the market will reverse. However, this approach can lead to more significant losses. It’s essential to cut your losses early and move on to other opportunities rather than letting emotions dictate your actions.

Stay Disciplined

Successful intraday traders follow strict discipline. They stick to their strategies, avoid impulsive decisions, and do not chase the market. Sticking to your stop-loss, target price, and trading plan will keep you on the right path even when the market becomes unpredictable.

Manage Leverage Carefully

Leverage allows you to trade with borrowed funds, but it also increases the risk. While leverage can amplify your profits, it can also lead to substantial losses if the market moves against you. Only use leverage if you’re comfortable with the added risk, and be mindful of how much you’re leveraging in each trade.

Intraday Trading Time

In India, the best intraday trading hours are typically between 9:15 AM and 3:30 PM. Market activity tends to peak during the opening and closing hours, making these the most volatile times to trade. Many traders prefer to trade during these periods to take advantage of rapid price movements.

Tax on Intraday Trading

Intraday trading is treated differently from regular stock investing regarding taxes. Since positions are bought and sold within the same trading day, tax authorities classify intraday trading as a speculative business activity. This classification has specific tax implications that every trader should be aware of.

Intraday Trading as Speculative Income

In India, profits made from intraday trading are considered speculative income. Unlike long-term investments, where capital gains tax applies, intraday trading profits are taxed as business income. This is because intraday traders do not hold onto their positions overnight, and their activities are seen as more speculative in nature.

Tax Rate on Intraday Trading

The tax on intraday trading profits depends on the individual’s income tax slab. The profits from intraday trading are added to the trader’s total income for the financial year and taxed accordingly. India has a progressive tax system, meaning that the more you earn, the higher the tax rate:

• Up to ₹2.5 lakh: No tax
• ₹2.5 lakh to ₹5 lakh: 5%
• ₹5 lakh to ₹10 lakh: 20%
• Above ₹10 lakh: 30%

Traders must add their speculative income from intraday trading to their total taxable income to determine the applicable tax rate.

Deduction of Losses

Losses incurred from intraday trading are treated as speculative losses. Speculative losses can only be set off against speculative gains, meaning they cannot be used to offset income from other sources, such as salary or business income. However, you can carry forward speculative losses for up to four years, which can be adjusted against future speculative profits.

Expenses Allowed for Deduction

Since intraday trading is treated as business income, certain expenses directly related to trading activities can be deducted. These may include:

• Brokerage fees
• Transaction charges
• Internet and utility bills related to trading
• Depreciation on equipment used for trading (like computers)

These deductions help reduce the overall taxable income from intraday trading.

Securities Transaction Tax (STT)

Securities Transaction Tax (STT) is a tax levied on every purchase and sale of securities listed on stock exchanges in India. However, the STT on intraday trades only applies on the sell side of the transaction. The current STT rate for intraday trading is 0.025% on the sale value of the shares. While STT is not directly linked to income tax, it does impact the overall cost of trading and can reduce traders’ profit margins.

GST on Intraday Trading

Goods and Services Tax (GST) does not apply to intraday trading profits. However, traders must pay GST on the brokerage and other service fees charged by their brokers. The GST rate for financial services is 18%, and it is levied on the brokerage and transaction charges, not on the profits or losses from trading.

Advance Tax for Intraday Traders

If you expect to have significant profits from intraday trading, you are required to pay advance tax. Advance tax is paid in instalments during the financial year rather than as a lump sum at the end of the year. The due dates for advance tax payments are:

• 15th June: 15% of the estimated tax liability
• 15th September: 45% of the estimated tax liability
• 15th December: 75% of the estimated tax liability
• 15th March: 100% of the estimated tax liability

Failing to pay advance tax can lead to interest penalties under Section 234B and Section 234C of the Income Tax Act.

Filing Intraday Trading Income

Traders must report their intraday trading income in Income Tax Return (ITR-3), which is the form used by individuals with income from business or profession. Since intraday trading is treated as speculative business income, traders need to maintain proper records of their trades, profits, losses, and expenses to accurately file their returns.

Tax Audit Requirement

If the total turnover from intraday trading exceeds a certain threshold, traders may be required to undergo a tax audit. For intraday trading, turnover is calculated based on the sum of absolute profits and losses for each trade. A tax audit becomes mandatory if:

• Total income exceeds ₹2.5 lakh, and
• The trading turnover is above ₹10 crore for FY 2023-24 (in case no digital transactions are involved).

A tax audit may still be necessary in cases where the profit margin is below 6% of turnover, even if turnover is below ₹10 crore.

Short-Term Capital Gains Tax vs. Speculative Income

Many traders confuse intraday trading with short-term capital gains (STCG). It’s important to note that STCG applies only to trades where positions are held for more than one day and up to 12 months. Conversely, intraday trading is classified as speculative income, and the tax treatment is entirely different.

Intraday Trading Benefits and Disadvantages

Intraday trading, where traders buy and sell stocks within the same trading day, is highly popular among active market participants. However, it carries both advantages and drawbacks that every trader should be aware of before diving into this fast-paced strategy. Below are the key benefits and disadvantages of intraday trading.

Benefits of Intraday Trading

1. Potential for Quick Profits One of the main appeals of intraday trading is the ability to make quick profits. Traders can take advantage of small price fluctuations throughout the day and earn money without waiting for long-term stock appreciation.
2. No Overnight Risks Unlike long-term investors who hold stocks for days, weeks, or even years, intraday traders close all positions before the market closes. This means they avoid risks associated with overnight news or events, such as earnings reports or political announcements, which can cause significant market movements.
3. Leverage Intraday traders often have access to leverage, allowing them to trade larger positions with a relatively smaller amount of capital. This can amplify profits when trades are successful, though it also increases potential losses.
4. High Liquidity Most intraday traders focus on stocks with high liquidity, which means they can be easily bought and sold without affecting the stock price. High liquidity ensures smooth trade execution and minimises the spread between buy and sell prices.
5. Opportunities in Both Rising and Falling Markets Intraday traders can make profits in both bullish and bearish markets. By going long (buying stocks) in rising markets or shorting (selling borrowed stocks) in falling markets, they can capitalize on any market condition, provided they have a good strategy.
6. Short-Term Commitment Intraday trading doesn’t require a long-term commitment to any particular stock. Traders can enter and exit positions based on market conditions without worrying about holding a stock through its long-term volatility.
7. Disciplined Trading Approach Successful intraday trading requires discipline and encourages traders to follow a structured approach. Traders often use stop-loss orders to manage risks, helping to prevent significant losses in volatile markets.

Disadvantages of Intraday Trading

1. High Risk ○ While the profit potential exists, the risks in intraday trading are equally high. Stock prices can move against the trader quickly, leading to significant losses, especially when leverage is involved. Market volatility can be unpredictable, making intraday trading risky for inexperienced traders.
2. Requires Constant Monitoring Intraday trading is highly time-sensitive. Traders need to constantly monitor the market and be ready to act quickly when prices move. This can be stressful and time-consuming, as one wrong decision or a delayed reaction can result in significant losses.
3. Brokerage Fees and Transaction Costs Frequent stock buying and selling leads to higher transaction costs, such as brokerage fees, taxes, and other charges. These fees can eat into profits, especially for traders making numerous daily trades. Even small commissions per trade can add up to a substantial amount over time.
4. Emotional and Psychological Stress Intraday trading can be mentally and emotionally taxing. Traders often face high stress levels due to the fast-paced nature of the market and the pressure to make quick decisions. Emotional trading, such as reacting to fear or greed, can lead to impulsive decisions and poor trade outcomes.
5. Limited Potential for Long-Term Gains Since intraday traders close all their positions by the end of the trading day, they miss out on long-term stock appreciation. Stocks that could have performed well over weeks, months, or years are not part of the intraday trader’s portfolio.
6. Margin Calls< Using leverage amplifies potential gains but also increases the risk of margin calls. Suppose the trade moves against the trader and their account balance drops below a certain threshold. In that case, the broker may issue a margin call, requiring the trader to deposit additional funds or sell assets to cover the losses.
7. Learning Curve Intraday trading requires a deep understanding of the market, technical analysis, and chart patterns. Beginners often face a steep learning curve and may incur losses before developing successful strategies. It can take time to acquire the necessary skills to trade intraday effectively.
8. Tax Implications As mentioned earlier, intraday trading profits are considered speculative income and taxed at higher rates than long-term investments. Additionally, any losses incurred in intraday trading can only be offset against speculative gains, not regular income.

Conclusion

Intraday trading offers the potential for significant profits, but it requires skill, discipline, and a thorough understanding of the market. It’s important to start with small amounts, use sound risk management strategies, and continually educate yourself on market trends. You can make the most of intraday trading opportunities with patience and practice.