BUSINESS NEWS - Intraday trading refers to the trading of securities within the space of a single day. You can hold both long and short positions in a security, however, you need to square off the position by the end of the day. The difference between your entry and exit prices determines your profit or loss on that trade.
Intraday trading is a highly popular method to profit from the movements on the financial markets. Intraday trading can be done through stocks, cryptocurrencies, commodities, and other such securities.
The strategies and methods required to be a successful intraday are very different from long-term investing. Here are the top 10 things you need to know before starting intraday trading.
1. Use Only Safe Brokers
Trading with a safe broker is essential. If you’re trading stocks, then you should only trade with a broker who is licensed by the JSE.
According to Forex Beginner SA "If you’re trading forex or CFDs, then you should only trade with a regulated forex broker. Forex Trading is regulated in South Africa by FSCA, and there are currently 70 OTC derivative providers under the FSCA’s ODP licensing regime. You should only choose one of the approved brokers for trading derivatives ”
Crypto trading is not yet regulated in SA, so you should not trade cryptos till it is regulated. Or you can trade it as a CFD instrument at regulated brokers that offer it.
Regulation and licensing is important when choosing a broker. This is because regulation helps to ensure that the broker has safety measures and the money you deposit with them is safe. It also helps you to stay away from scams. You can also pursue legal action against a regulated broker in case of any errant practices.
2. Avoid Leverage
Most derivatives & CFD brokers offer very high leverage. With leverage you can open a position that is larger than your account capital.
For example, if you are using a leverage of 1:100, and your account capital is R1000, then you can trade a position size of R100,000. This is called margin trading.
With this there is a risk that you can lose your capital very quickly. So if your broker does not allow you to set low leverage, then you should self-regulate your leverage & open a trade at no more than 1:10 leverage.
3, Don’t Panic
It’s quite easy to start panicking while trading intraday. Real money is on the line and you can keep losing more money every second. In such moments, it is important to keep a calm mind. Panicking can force you to make a hasty decision in the heat of the moment. These decisions are usually ill-thought and you may end up regretting them later.
To prevent panicking, you should have a trading strategy in mind before you enter into a trade. This strategy should already cover what you’re going to do if things go south. Having a stop-loss should be essential to your trading strategy.
4. Remember the Overnight Risk
As an intraday trader, you should strictly square off your open positions on the same day. Carrying positions overnight carries overnight risk. This is unnecessary risk and you may end up losing more money than you would otherwise.
The prices of securities can move in highly unpredictable ways overnight. Furthermore, you cannot monitor the movement of prices after the trading day closes. This means that you can’t cut your losses before the opening bell on the next day. Hence, it is always advisable to close bad trades on the same day itself.
5. Have and Follow Stop Losses
The importance of using stop losses while intraday trading cannot be stressed enough. You should always enter a stop loss when entering into any trading position. Regardless of whether you’re longing or shorting a security, you should have a stop-loss in place with your order.
A stop loss is essential so that you do not make emotional decisions in the heat of the moment. A stop loss can be calculated beforehand so that you know when the best time to cut your losses is. It also prevents you from taking an unnecessary risk with an open trade.
Most of all, a stop loss limits your losses from a bad trade.
6. Make a Trading Strategy
When you study how to be an intraday trader, you will find out about the importance of having a trading strategy. Rather than making trades on a whim, you should have a thoughtful trading strategy that backs up your trades.
This trading strategy should tell you about the kind of trades you will be making, when you’re going to book your profits, when you’re going to cut your losses, and how to find trading opportunities.
Once you make a trading strategy, you should be sure to stick with it. You can always improve your strategy as you learn more, but always have a plan. Do not try to make your trades on the fly.
7. Don’t Lose Sleep over Losses
As a rule of thumb, you should not invest more money than you can afford to lose while intraday trading. This helps to make sure that your losses do not affect your financial situation to a disproportionate degree.
Losses are a part of intraday trading. Even the best and most successful intraday traders face losses on a daily basis. The markets are inherently unpredictable, especially in the short term. Hence, you shouldn’t feel bad over your losses or lose sleep over them.
However, you should make sure that you learn from your losses and try to not make the same mistake twice.
8. Trade Liquid Stocks & Instruments
It is usually better to trade in highly liquid stocks than less liquid ones. The high liquidity of a security means that the trading volume is high. This makes it easier for you to enter or exit from a trade since the likelihood of an opposite trade on the exchange is high.
Intraday trading is dependent on the precise timing of entry and exit trades. A highly liquid security will help you realize the exact price of your trades better.
This will help you to get out of a position easily which could be difficult in case of illiquid assets & instruments.
10. Avoid Trading in Highly Volatile Markets
You should always try to trade in a steady market rather than highly volatile markets. A steady market means a market in which the direction (bullishness or bearishness) is relatively predictable.
Highly volatile markets are notoriously hard to predict and they change direction quickly. It can be very hard to make profitable trades under such conditions.
Watch out for any news or upcoming event i.e. an Economic event or Earnings call that can affect the price of an asset.
10. Decide a Profit Margin
It is advisable to set your price targets based on a risk vs. return metric. Ideally, your price target should be a multiple of your stop loss. The multiple could be 1:2 or 1:3. However, a multiple of 1:1 is not adequate.
You should have enough confidence in your trades that the risk is worth the reward. If your price target is set at a multiple of 1:1, then that means that the risk is not worth the reward.
11. Do Not Blindly Follow Trading Tips
Almost every broker provides trading tips to their traders. These tips are made by expert market analysts, however, you should not trust these tips blindly. You should conduct your own research and independently arrive at the same conclusion, before deciding to follow a tip.
The main reason for this is that trading tips have a high likelihood of being wrong. Most trading tips do not come to fruition. Hence, you should trust your own instincts and research.
Wrap Up
Intraday trading is not meant for the faint of heart. There is a long learning curve to becoming a successful intraday trader. It may seem like an easy way to make money, however, nothing could be further from the truth. You should study as much as you can and practice paper trading before investing real money into your trading.
Article supplied by Forex Beginner SA
