Anyone can open a demat account online with any registered broker. There are two ways for a stock market operator to perform trades, one is through value investing for the long term, and the other is through day trade. Intraday trading is the art of buying and selling one particular script of security on the same day, on the same exchange, with the same broker.
The main purpose of the day trader is to perform trades and make the most out of the tiny price movements of a particular stock or indices. During volatile market conditions, it is favourable for a day trader to earn more profits from the situation. However, before engaging in any day trading execution, one must thoroughly understand the risks and uncertainties involved in intra-day trading.
Strategies for Day Trading
Over the years, many day traders have come up with full-fledged trading strategies to perform during live sessions and make a consistent profit daily. With the evolution of the markets, any individual holding a trading account has access to day trading and value investing, whichever is convenient. Here are some of the intra-day trading strategies used by traders traditionally:
Open High-Low Strategy
The name itself reveals that the strategy is for the opening hours of the stock market. Within 15 mins of the open live session, if the stock price has given the high for the day and starts falling due to the selling pressure, the particular stock should be short-sold. On the other hand, when the stock price is at the lowest point in the beginning and rises later with more buyers, it indicates a support point, and the script must be chosen for a buying order.
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Breakout Strategy
Every stock price has support and resistance levels given daily, weekly, fortnightly and monthly. These points at specific levels act as indicators for traders to take action. When the price rises above the resistance level, it means a buy order for that script, and similarly, when the price hits below the support level and keeps breaching it, a sell order for that script is the right option.
Pullback Strategy
Only experienced, well-informed traders adopt the pullback strategy. It involves catching the right price level. When the stock price hits a high, with resistance, it pulls back. The trader can assume the best point for entering a buy side to make the profits after exiting on the highest high of the day and vice-versa for stocks hitting the lowest lows of the day.
News-based Strategy
This type of trading involves buying and shorting stocks based on the news of the day or the previous day. Stocks with good positive news are selected for buying, and stocks with negative or quarterly/monthly losses, are for short selling.
Risks involved in day trading
Low Probability
It is proven that more than 90% of traders in the market consistently lose money, and only the skilled 10% can make profits. It’s extremely stressful and involves constant capital fusion. For a trader to succeed in intraday trading, they need to overcome severe financial losses during the process.
Borrowed Money
Brokers are allowed to offer margin facilities to the traders performing day trades. It means a trader can trade five times the amount they have in the trading account. The total value of the trade rises, and at the same time, the profit or loss also escalates five times. This facilitates 80% of the total trade value on borrowed money from brokers.
Margin Calls and Penalties
The margin facility is almost 80% of the total trade. Hence, when a trader utilises the margin to make the trade, they are obligated to make payments once the trade ends. If there aren’t sufficient funds for repayment within 2 days of those trades, a margin call penalty is levied with interest charged every day till full repayment.
Conclusion
The accuracy rate for day traders is very low. The returns earned through day trading can end up being a loss for the next or some other day. The risks involved during volatile sessions are very high and one small mistake might take all the profits earned during the day. Warren Buffet, one of the best investors of all time, has advised new and amateur traders to study and perform value investing rather than day trading.