InvestorQ : As an intraday trader, what are some of the major risks that I need to focus on?
Bhavika Nehru made post

As an intraday trader, what are some of the major risks that I need to focus on?

Bhavika Nehru answered.
3 years ago

The first and the most basic risk in intraday trading is the stock selection risk. That is where it all begins; how you select the stocks and what stocks you zero in on. If you get your stock selection wrong, then you are likely to get the full intraday trading chain wrong. You need to select stocks that are liquid and exhibit clear chart patterns. Most intraday trading losses occur because the traders get their stock selection wrong in the first place.

As an intraday trader, you are your own chartist. You need to get your levels right and remember that technical analysis by itself is not a perfect science. It is based on estimates and past patterns. When you identify and trade around certain levels you are assuming that past patterns will repeat. That may not necessarily be the case. If that does not happen, you are likely to run the risk of stop losses triggering on either side of the trade.

Market volatility is another major risk in intraday trading. Even with your best of stocks and level analysis, if the market suddenly turns volatile due to external macro factors then you will be staring at stop losses getting triggered. Quite often, your targets are hit after the stop loss gets triggered but that is the risk that you do run. The problem in volatile markets is that if a series of stop losses get triggered in a day then your trading capital may be at risk.

Risk of overtrading is something you need to be careful about. You go short on a stock and it goes up further. You double up on the long side and the stock starts correcting. Overtrading happens due to a variety of reasons. You could overtrade because you may be trying to recover losses you made. Alternatively, you may average your positions when the stop losses are approaching and that could also lead to overtrading. This is a risk you must ideally avoid.

Intraday trades are essentially leveraged trades; in fact they are mega leveraged trades. This is more so if you are trading intraday in futures. Just as profits can be magnified in intraday trading, your losses can also get magnified in intraday trading. This is quite normal because cover orders and bracket orders allow you much higher leverage than normal. It also happens when you are trading intraday in futures and options. In such cases, the losses get multiplied by another factor.