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Mastering the Art of Intraday Trading: Strategies and Tips for Success

Intraday trading, also known as day trading, is a more risky approach to investing in the stock market that significantly differs from the traditional understanding of long-term investments. Trading itself is associated with high risks, and it is crucial for every trader to understand the key rules and best strategies in intraday trading to avoid potential losses and maximize profits within shorter timeframes.

Our article will cover the following aspects related to intraday trading:

  • Key aspects and risks of intraday trading.
  • Choosing the right tools for intraday trading.
  • Essential rules for successful intraday trading.
  • Tips for successful trades.
  • Intraday trading strategies.

Main Aspects and Risks of Intraday Trading

Intraday trading is considered one of the riskiest methods of trading financial instruments, surpassed only by working with uncovered derivative financial instruments and scalping (opening multiple trades within a day). While it can yield significant profits in the right hands and with the correct strategy, there is also the risk of losing the entire capital invested. Therefore, it is advisable for beginners to refrain from this investment strategy, and experienced investors should only allocate an amount they can afford to lose without jeopardizing their overall financial situation.

One of the major risks in intraday trading is psychological in nature. Impulsive decisions made after an unsuccessful trade tend to lead to further losses. It is human psychology to want to recover quickly after making a wrong decision and incurring a loss.

It is important to consider the time commitment required for intraday trading. For such investors, it becomes a full-time job as they need to constantly monitor their positions, place orders, and track price fluctuations. Simply buying an asset at the beginning of a trading session and selling it at the end will likely result in losses.

It's worth noting that standard risk reduction methods used in long-term investments, such as diversification, do not work in intraday trading. In fact, diversification can hinder intraday trading, as we will explain in more detail when listing the intraday trading rules.

However, there are ways to reduce risks or limit losses even in intraday trading. In addition to using stop-loss and take-profit orders, hedging can be employed.

Therefore, it is much wiser, especially for beginners or individuals with limited experience, to opt for long-term investments. Long-term investing requires less effort, time, and stress for stable capital growth. In other words, the risks associated with long-term investments are incomparable to the risks involved in trading.

Choosing Tools for Intraday Trading

Choosing the right tools for intraday trading can be divided into three key factors:

The first step for a day trader is to determine what to trade. It can be stocks, ETFs, futures – what matters is that it is a highly liquid instrument. Liquid instruments usually have high trading volumes, allowing traders to buy and sell significant quantities without significantly impacting the price. Since intraday trading strategies rely on speed and precise timing of trades, high liquidity and large trading volumes facilitate entering and exiting positions.

The next factor to consider when choosing a trading instrument is volatility. Day traders require price fluctuations to make money, and a lack of volatility or prolonged sideways movement is unlikely to result in profits. Additionally, for a trader, the direction of the movement – whether it is upward or downward – is not crucial due to the ability to engage in short selling.

The third factor among the three main ones is correlation with another instrument. This can be a commodity, an index, or a sector. When the price of the related instrument moves upwards, the price of an individual stock (ETF or futures) also increases. Although this is not a mandatory factor, it makes trading more predictable.

It is also important to consider the characteristics of individual instruments. For example, when trading futures, leverage is automatically applied – a borrowed capital for purchasing a futures contract. This means that when buying an asset for $1,000 of your own funds, with a leverage of 10:1, an additional $9,000 will be borrowed. With a leverage of 20:1, it would be $19,000. In essence, the trader is trading with borrowed money, which potentially increases profits but also significantly amplifies risks. Therefore, each instrument requires an individual strategy to be developed.

Key Rules for Intraday Trading

Now that we have identified the right trading instrument, let's discuss the key rules of intraday trading that one should know and follow to avoid costly mistakes.

Choose 2 or 3 liquid instruments, no more. Remember, you need to monitor the movement of each stock almost constantly, so it can be challenging to keep track of multiple assets. Day traders usually invest substantial amounts in 1-3 stocks and monitor their movements. Before entering a new position, the existing one is closed.

Lock in profits when the target price is reached. Many intraday traders struggle with fear or greed. However, it is important not only to cut losses but also to lock in profits once the target price is reached. If you believe that a stock has further potential for price growth, adjust the stop-loss order (move it higher) to align with that expectation.

Develop your strategy and stick to it. Each time you enter a trade, you need to have a clear plan for intraday trading. Determining entry and exit prices before the start of trading is crucial. This allows you to stay focused on making profits without distractions. Moreover, once a stock reaches the target price level, traders are advised to close their position rather than getting greedy and waiting for higher profits. Without a well-defined strategy, successful trading is unlikely, and this applies not only to short-term periods but also to longer ones.

Fixing Losses in a Timely Manner and Understanding Intraday Trading Strategies

Fixing losses promptly and decisively is crucial in both intraday trading and investing, including stock purchases. However, the motivations and time horizons for these strategies differ. Fundamental growth drivers are used in one case, while technical factors are considered in the other. In other words, the goals of buying do not align. Yet, traders often refrain from selling their positions when prices decline, hoping for a price recovery to avoid realizing losses. However, this process can be prolonged, and a global downtrend lasting several years, like the continuous decline in General Electric stocks for two years, can occur. The maximum loss in such cases could reach 78%, as depicted in the figure below. During this time, the invested funds could have been put to work, potentially generating profits.

This is where tools like take-profit and stop-loss come into play. They are essential for traders, allowing them to limit losses or lock in profits when stock prices decline. Sometimes, price drops occur rapidly, and it is practically impossible to manually track and place orders in the fast-paced environment of intraday trading. Therefore, specific orders are placed for each trade, which can be adjusted as the asset price moves.

Hence, before entering any trade, a trader needs to understand their goals – when to exit under different market scenarios. Orders with specific conditions are placed based on this understanding.

Do not trade against the market. In other words, it is not advisable to open positions against the established dominant trend. This rule applies not only to intraday trading but also to short-term and medium-term investing. Even experienced professionals with advanced trading tools cannot predict market movements. There are instances when all technical indicators suggest a decline, but the asset continues to rise against expectations. These factors are indicative and provide no guarantees. If the market moves against your expectations, it is important to exit a position if it is open and, under no circumstances, open a position that goes against the prevailing movement to avoid significant losses.

Distinguish between trading within a range (sideways movement) and trading with a trend. Markets do not always trend; sideways movements, known as ranges, are often observed – price trading within certain levels without a predominant trend. In such cases, intraday trends frequently alternate, and identifying the prevailing direction becomes challenging. To trade successfully, it is necessary to ensure that intraday price movements are significant enough for potential profits to outweigh the risk. Traders draw horizontal lines (instead of diagonal lines in trending markets) to identify the range and trade based on a similar principle: buying when the price moves into the lower horizontal support area and starts moving upward, and selling when the price reaches the upper horizontal resistance line and starts declining again.

Tips for Successful Trades

Entry timing: Experts often recommend that inexperienced traders avoid trading during the first hour after market opening due to high volatility and often unpredictable news since the previous closing. After 11:00-12:00  volumes and volatility decrease significantly, and many traders cease their trading activities. In the last hours of the trading day, volume and volatility increase again. Friday trading is also worth noting as it tends to be more volatile due to the reluctance to leave open positions over the weekend.

It can be concluded that experienced traders may find the market open and close more suitable, while beginners may prefer the midday.

Exit positions under unfavorable conditions: This applies to both global fundamental factors that unpredictably impact the market and specific news related to a particular stock or sector. For example, recently, it has been quite risky to speculate on Chinese company stocks due to the unpredictability of that market and the potential downturn of the entire sector. Additionally, if you are already in a position and the conditions become unfavorable, it is recommended to exit immediately rather than waiting for the stop-loss to be triggered. This helps reduce losses.

Always close open positions at the end of the day: Some traders may be tempted to leave their positions for the next day if their targets are not met. This is one of the biggest mistakes, and it is crucial to close all open positions, even if it means realizing a loss. After all, no one knows what might happen during market closing, and potential losses here can exceed missed profits.

This is particularly evident in gaps. On positive or negative news, gaps can be enormous, leading to significant losses. And in such cases, a stop-loss will not help.

Take profit when the target level is reached or adjust the take-profit level: Traders need to not only minimize potential losses but also lock in profits once the target price is reached. However, greed or fear often prevent traders from doing so. Therefore, if a person believes that a stock has the potential for further price growth, the take-profit and stop-loss levels should be adjusted to align with that expectation.

The trailing stop can assist in this regard. It allows the position to move into a breakeven zone automatically by raising the stop-loss. The figure below provides a visual example of adjusting the trailing stop and profit-taking. It is worth noting that this tool serves not only as an advanced stop-loss but also as a take-profit, meaning that one automated order is placed instead of two.

Day Trading Strategies

It is important to note that a strategy is the primary and essential tool for a trader. Without a strategy, a trader either quickly becomes an unsuccessful investor, getting stuck in a position for a long time, or exits the market due to frequent losses.

One strategy involves using moving averages. A moving average is the average price over a certain period. Intraday moving averages work on the same principle as on other timeframes: when the quotes are above the moving average, it indicates an uptrend, and when they are below, it indicates a downtrend. They also act as support and resistance zones, from which the price can bounce off, and their intersection can be a signal to enter a position. Special indicators have been created based on moving averages to assist in trading, such as MACD, Alligator, and others. This strategy can be combined with news trading and trend trading.

The Momentum trading strategy involves trading on price momentum generated by news related to an asset. In this case, stocks are selected based on the news flow, and the role of the day trader is to study such news before the market becomes available for investments. The key is to enter a position in a timely manner and capitalize on the news within a specific time frame, whether it's a few minutes, hours, or even the entire day.

This strategy is particularly effective in biotechnology companies, as the approval of drugs often leads to an immediate and rapid increase in stock prices.

The Reversal Trading strategy is one of the riskiest strategies, involving investing against the trend. Traders look for stocks that have reached their local lows/highs and buy/sell them when the price reverses and a potential trend reversal starts. However, it is important to note that this strategy is one of the most challenging and is suitable only for experienced traders due to the difficulty of finding true reversal levels.

The Breakout Trading strategy, which is the opposite of the reversal strategy, involves breaking through certain support and resistance levels with increasing trading volumes. If the price breaks these levels, the trader enters a position. If the price fails to break these levels, the previous strategy comes into play. The fundamental idea behind this trading strategy is that a level reflects the accumulation of supply and demand, and beyond this level, there is a gap in demand. For example, if the supply is not satisfied, the price will continue to decline until the next accumulation. In simple terms, if the quotes cross the threshold values, there is a high probability that they will continue the trend.

It is worth mentioning the situation when a retest of the level occurs on the chart. The price breaks the support or resistance level but returns to it temporarily and tests the level. This is where the name "Retest" comes from. If buyers prevail in this case, the price continues its movement after the breakout. The complexity lies in the fact that a potential retest can be a false breakout, where the quotes return to the boundaries of the range.

The Gap and Go strategy involves buying stocks that have opened with a gap up or down at the beginning of the trading session. Advocates of this intraday trading method buy such stocks in anticipation of the gap being filled during the day. Gap filling is a common practice in the stock market and occurs quite often. However, it is important to note that there is no guarantee that the gap will be filled, and it often remains unfilled, or it takes a long time to close, allowing this strategy to be used in longer-term trading as well.

Conclusion

In summary, trading is a tremendous effort that requires a lot of effort, time, and continuous attention to financial instruments and the market as a whole. A trader must spend the entire day at the trading terminal to monitor short-term price movements. Additionally, transaction costs such as commissions and taxes will be significantly higher than those for investments due to the frequency of trades.