How do I understand intraday trading in a very simple manner and can you explain the same to me in a very elementary way?

Day trading or intraday trading is the act of buying and selling the stock on the same day. You can buy and sell it on the same day or you can even short sell first and then buy back before end of trading session. Here are some basic examples to enable you to understand the concept of intraday trading better.

A trader buys 1000 shares of SBI in the morning at Rs.322 and closes the position when the price goes up to Rs.326. This is an intraday trade. There is no delivery here and the profit of Rs.4000 (1000X4) will be credited to the intraday trading account. Of course, you will get it net of brokerage and other statutory costs.

Look at another instance. A trader buys 1000 shares of NALCO at Rs.56. During the day when the price goes down to Rs.54, the trader sells 500 shares. So, the loss on 500 shares closed intraday will be Rs.1,000 (500X2). The balance 500 shares will go into demat account as delivery.

A trader sells 100 shares of Infosys at Rs.820. When the price of Infosys goes down to Rs.799, the trader buys back the 100 shares and books intraday profit of Rs.2100.

A trader sells 1000 shares of IndusInd at Rs.1280. When the price goes up to Rs.1285, the trader books losses of Rs.3000 on 600 shares. The 600 shares will be treated as closed intraday and for the balance 400 shares the trader will have to give delivery from his demat account. Otherwise, the stock will go into auction and can entail huge losses.

Here are some important points that you need to necessarily be aware of about intraday trading.

Intraday positions must be closed on the same day itself. That is why the broker allows you to take a large position by paying a small margin. What happens if you create a position and then forget to close out? Since you would have selected it as an intraday trade, the trading system will automatically close all open positions around 3.15 pm as part of the broker’s risk management system (RMS).

It is possible to trade profitably in intraday with discipline. Remember, there is nothing like assured returns in equities. But you can reduce your risk of losses in intraday trading. How to do it? Focus more on managing risk than on getting returns. So put your stop losses and profits targets in the right place. As an intraday trader always trade in the side of momentum. Don’t sell a rising market and don’t do bargain hunting in a falling market. As long as you are discipline, intraday trading can work for you in the long run.

Let us look at how to select stocks for intraday trading? You can only do intraday trades in rolling settlement stocks only. Stocks like Trade-to-Trade (T2T) stocks and Z-Group stocks, where only delivery is permitted, are not eligible for intraday trading. Firstly, the stock must have sufficient volumes and therefore the bid-ask spreads must be very thin. That will reduce the risk for intraday traders. Secondly, the stock must have a low impact cost and must not be vulnerable to large orders. There is also an argument of pragmatism here. There is no point in trading intraday in a stock that hardly moves during the day. For example, a stock like NTPC may be hard to trade intraday, so look for high beta and movement.

Should intraday traders focus on charts or balance sheets? The answer is that you need to focus on momentum! Identify the trend and trade on the side of the momentum. Don’t ever try to outsmart the market as the collective wisdom of the market will get the better of you. News flows and their impact is critical. Earnings upgrades, earnings downgrades, special dividends, major orders, and bonus issues can create momentum for a stock. Technical charts matter because they give the supports and resistance levels on charts, relative strength, breakouts, and moving averages.

Finally, a bunch of very simple rules can help you trade intraday in a more efficient and effective manner.

· Remember your intraday trading arsenal has two weapons; stop loss and profit target. You can use cover orders and bracket orders in intraday trading to enhance your limits.

· Intraday trading is about discipline and discipline alone. Don’t think like an investor because you are not. You either book a profit or book a loss the same day. Remain an intraday trader by design!

· Market always has an intraday trading message to give. The intraday trader must read the message, interpret the trend and trade accordingly. When it come to intraday trading, the trend is your friend.

· Your capital is finite so you must churn your money rapidly. The quicker you churn your money in intraday trading, the more you can put your capital to use. Profit is what you book.

· Don’t forget to keep a trading diary handy with you. Use it to keep a record of your trades and your thinking behind trades. It will help you learn things that may have otherwise missed your eye.