Basics of day trading | Part 1 of 5
What is intraday trading?
Day trading or also referred to as intra-day trading involves buying and selling the tradable instrument on the same day. In-day trading positions are not carried overnight. Trades are closed during the same day whether in profit or in the loss. Traders who trade the markets during the day are called day traders. It can be a profitable career opportunity Lets us understand day trading in detail.
Types of day trading
Day trading can be classified into two categories—aggressive and moderate day trading.
High-frequency trading, jobbing, and scalping are aggressive styles of day trading. It involves the study of smaller time, price action like 1-minute 5-minutes and trade either buy or short sell are initiated with a holding period of 5 minutes or 15 minutes.
In a moderate style of day trading higher day trading time-frames like 15-minutes are studied for a trade decision. Holding periods in the moderate style of day trading is for an hour or more.
Let’s take a peek into a few-day trading jargon before we start planning our trade. Here are a few to lay the foundation
Day trading can be done for income generation or additional cash flow to support your profession. Traders who conduct the business of day trading as income generation and if the only source of their income is day trading are full-time professional day traders. Those who trade for additional income are part-time day traders. Initially when you are new to markets take the part-time day trader route, once you gain experience and understand the business completely after a considerable amount of time you can think about being a full-time day trader.
The most preferred method of taking a trade decision is applying technical analysis or study of price charts. Intra-day price charts are analyzed with regard to trends, momentum, support and resistance. Intra-day price charts are of shorter duration like 1 min, 5 min,15 min or 60 minutes. Some of the technical indicators or tools applied by day traders are moving average, Fibonacci studies, Elliott wave analysis, top-down approach and other technical studies applied on intra-day charts.
Day trading is a self-directed profession in which both trade decision-making and execution of the trade are done by the trader himself. Direct access platforms are provided by brokers which have decision-making tools like price charts, real-time news and derivative data and buying and selling can be done on the same platform. Day trading is now done online and all online brokers have direct access platforms. It can be an app-based interface, browser-based or an excel-based trading platform.
Leverage involves getting more buying power on your capital. Eg if you have 100,000 rupees in your account and a broker gives you five times leverage, this means you can take a trade exposure of 500,000 rupees. All online brokers provide leverage which can vary from 2 times to 10 times your capital. Day traders should understand that leverage is a double-edged sword when you are right on your trade you make a substantial amount and when a trade is loss-making then you lose a considerable amount of your capital. One should take leverage only after spending considerable time in the market and having gained experience in day trading. Traders who are new to markets should avoid taking large leverage initially.
High probability trading time
The exchange trading time on NSE and BSE is from 9:15 to 3:30.The entire trading time can be divided into high probability and low probability trading time. The time period from 9: 15 to 1:30 are high probability trading time. During the morning hours, there are good price swings both up and down. Afternoon hours are also known as the doldrum time in which prices spend a considerate amount of time trading sideways.
Stocks for day trading
Day trading is done in highly liquid stocks which are part of NSE 50 or actively traded stocks from the future and options segment. Day trading can be done in cash, future and options. Day trading should be avoided in illiquid stocks and mid-cap stocks. As one gain experience, the majority of the trading activity should be nifty and bank nifty(indices). By focusing on indices and a selected group of stocks which are index heavyweights, a trader develops eye ball setting with a price chart.
Risk management in day trading is the most important element to keep your account healthy, almost all traders are aware of how important managing risk is yet very few understand and follow solid risk management strategies. Position sizing rules are to be applied to each trade. Risk per trade and per day has to be fixed and traders should trade within the risk tolerance limit.
A trading journal is a log that you can use to record your trades. Traders use a trading journal to reflect upon previous trades so that they may evaluate themselves. You can use journals to evaluate where you can improve your trading. They are a useful form of record-keeping. Entries with respect to entry price, stop loss, targets and reward to risk are entered. It helps you to identify weak points and strong points in your day trading style. Trade journal assists in increasing your trading consistency and helps you choose your best trading strategy.
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