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What is intraday trading?

By Connor Freitas

Strategies, tips, pros and cons to grow your skills

What is intraday trading

Intraday trading capitalises on short-term movements in the price of shares. These traders seek to profit from fluctuations in a single trading session and don’t hold on to shares overnight or during the weekend.

This type of trading requires complete immersion in what’s happening in the market. Quality research is key to spotting the right opportunities — and usually, intraday traders rely on price charts that show what’s happened to a stock’s performance in the past 60 seconds, five minutes, 15 minutes, half-hour or one hour.

How intraday trading works

Intraday trading involves attempting to uncover patterns in a stock’s movement and using this intelligence to make short-term gains. If you ever watch financial news channels, you may hear analysts talk about “intraday highs or “intraday lows.” This refers to the highest and lowest prices that a company’s stock has managed to achieve during business hours.

Traders rely on indicators that can help suggest what will happen next. Moving averages look past levels of volatility to reveal underlying trends in price movements – enabling intraday traders to figure out whether shares have been depreciating or appreciating during recent trading sessions. Meanwhile, Bollinger Bands incorporate a stock’s deviation from the moving average – adding upper and lower bands. Roughly 90 per cent of price action in a security happens between these two bands, enabling intraday traders to assess levels of volatility.

Generally, intraday trading is best suited to those who follow the market closely and have the skill to time their trades for maximum impact. An appetite for risk is another important attribute to have as losses can be quickly accrued – especially if margin is used as a technique for amplifying potential gains.

Intraday trading: Common strategies

Let’s take a look at some of the common strategies relied on by intraday traders. They include:

  • Following the news: Economic data can have a massive impact on sentiment in the markets – and specific announcements from a company concerning new products, personnel changes and financial updates can see share prices soar or plummet. Some intraday traders plan their strategies around what’s in the headlines and aim to profit off the market’s response.
  • Range trading: This intraday trading strategy involves capitalising on a period of stasis in a security’s price, where it is consistently trading between two levels. To ensure that this is an ongoing trend rather than just a new price high or price low, traders aim to see whether prices bounce back from a support level twice and fail to move beyond a resistance level. From here, traders can buy stock when it begins to recover from a support level, and sell when it approaches a resistance level.
  • Scalping: This approach involves attempting to make small profits on a regular basis, so they accrue to form a tidy sum by the end of the day. Over the course of a trading session, most shares will rise by a matter of cents rather than dollars – and by targeting liquid stock where thousands of shares can easily be sold, scalpers will enter into a position in bulk and exit the position when prices have moved by several cents in their favor.
  • Algorithms: No market is perfect, and there are occasions where inefficiencies can arise. For example, exchange rates may mean that a stock that’s selling for $45 on the New York Stock Exchange is being offered for $45.20 in London. Arbitrage involves acting speedily to capitalise on this imperfection – buying the stock at the higher price and selling it at the lower level.

Intraday trading: The pros and cons

When it comes to the advantages of intraday trading, the fact that no positions are held overnight or during the weekend eliminates the risk of prices opening substantially lower because of news or other developments that fall outside business hours. These traders can also mitigate losses through stop-loss orders, meaning they automatically exit a position if things don’t go to plan. And, whereas a volatile market is usually bad news for longer-term investors, uncertainty can provide exciting opportunities for intraday traders to realise a profit.

That said, there are some downsides to consider. The sheer frequency of transactions made by an intraday trader can cause fees to add up, and the use of margin can amplify losses substantially. It is also incumbent on the intraday trader to ensure they have exited a position by the end of the business day. Annoyingly, the short-term nature of this strategy can also mean exiting a position before a profit is made – or when there could have been further gains to realise.

Intraday trading tips to remember

For these techniques to work, it is crucial that liquid stocks are chosen so large quantities can be bought and sold quickly. Although it can be tempting to remain in a winning position, banking profits when pre-agreed targets are reached is a better solution. Finally, specialising in a handful of shares – understanding their resistance and support levels, their historical performance, and the external factors that can influence their price – increase the chances of making an informed decision.

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