Basics of Intraday Trading

As an important element of your learning in the stock market, it is essential that you first get familiarized with certain basic terms and concepts

Getting Started
As is evident, trading means buy and selling and share trading means buying and selling of shares in share market.

Mainly there are two ways of share trading.
1) Online Share Trading

Doing share trading with the help of a computer, internet connection and with a trading and Demat account is called Online Share Trading. If you are planning to do trading yourself then opening an online share trading account is advisable. However, self trading requires that you have the required time, stable internet and electric supply and can give it your full time focus and energy.

Considering you have all of the above, the benefits of Online Share Trading are:

• There is no need to depend on any broker or anybody else to place your order. In short you are the boss of your own to do trading (buying and selling) of shares. It’s reliable, convenient and you can take your own decisions yourself by actual seeing or analyzing the market on the computer screen instead of calling the broker all the time.
• It’s not possible or practical for a broker to update you about each and every local or global development that could impact the share market. So if you are doing online trading yourself, then you can make your own decisions by doing timely profit booking or timely exit.
• By doing online trading yourself, you can see and judge where the stock market (or your share) is heading, which is not possible if you’re trading through broker. Some online trading systems have graphs integrated in their system, so your job is to just add those graphs and check the status of current market (or share) and depending on your analysis you can take steps towards successfully trading.
• All your transactions and related documents can be seen online and can also be downloaded to your PC without depending on your broker. You can also check the status of your trade transaction on a daily basis through you online trading system.

2) Offline Share Trading

Doing share trading with the help of broker is called offline share trading. In other words trading will be done by another person on your behalf based on the instructions given by you. The other person would be a broker. The broker will do the buying and selling of shares on your behalf depending on the instructions given by you. So in offline share trading while you don’t need to have computer, internet connection but you do need to have the offline demat account.

Buying and Selling in the stock market

Following are the two methods of buying and selling of shares in Indian share market.

1)                Market Order

When you place a buy or sell price of a stock at market rate or select market order option in trading terminal then the price get executes at the current rate of market. The market order gets executed immediately at the current available price. In market order the shares will get executed at the best current available price. Market order is used if you want to execute your order very fast and at available price. If you wish to buy or sell shares at any specific price then market orders is not suitable for you then have to go for limit order.
2)            Limit Order

It’s totally different from market order. In limit order the buying or selling price has to be mentioned and when the share price comes to that price then the order will get executed. But you cannot be sure whether or not that the price will come to your limit order and whether the order will get executed.

Day traders, especially those who make use of margin amount, generally take precautions while using limit orders since all transactions are typically required to be closed before close of trading session at 3:30 PM. So if the price doesn’t reach the limit order then the order will be open (pending) and could get settled at the prevalent market closing time resulting in significant losses.
3)            Stop Loss Order

Stop loss orders are used to reduce or to minimize the losses. This is very a important term especially for day traders. In Stop loss order the trigger price and the limit price for exiting a given position has to be mentioned, and once the price reaches the trigger price the order get executed with the best price available between the trigger price and the limit price.

For example –

A trader bought shares of Company X at Rs 1000.
The stop loss order is for Rs 990 and stop loss trigger price at Rs 995
So if the stock price starts falling, then the trade will get executed when the price touches Rs 995 and between Rs 990.

Different types of Stock trading

1)                  Day trading

Buying and selling of shares on daily basis is called day trading or Intraday trading. This means that whatever one buys today has to be sold the same day, or whatever is sold today is to be bought today itself, and very importantly during market hours that is between 9.15 am to 3.30 pm (Indian time).
In day trading, brokers and Trading companies generally provide margin to do trading.  Margin amount means that a trader can actually buy stocks worth more than his actual principal amount with the brokerage house putting up the remaining “margin money”. For example if price for Stock X is Rs 1000, the margin amount could be Rs 250. A trader who has Rs 1000 to invest, can actually buy 4 units of Stock X, which otherwise would required Rs 4000. If the price falls to say Rs 950, then the trader loses Rs 200 (Rs 1000- Rs 950 X 4) of his Rs 1000. Similarly, if the price increases to Rs 1050, then the trader gains Rs 200 on his investment of Rs 1000. Brokerage companies put up the margin money depending on the assumption that the price of a certain stock will not fall or increase beyond a certain percentage and thus its potential losses are hedged. Additionally most trade exchanges discontinue trading in a particular stock if the price increase or decrease is more than 20% in a single trading session. Most brokers require that if you use margin amount for day trading then you have square off your shares before market closes irrespective of share price or whether you are making loss or profit.

Trader’s who don’t use margin amount and trade only with their available amount, need not square off their positions. However, they do carry the risk or reward of the future trading sessions.

2)                  BTST (Buy Today, Sell Tomorrow)

BTST means that Traders buy a certain share on a given day, and square it off the following day. This is typically done when traders expect some significant movement in the market anticipating some development (budget, inflation data, etc) which could impact the price of the stock

3)                  Positional Trading

This means when Traders buy a certain stock with the intent of holding onto their position for a certain period of time anticipating the stock to either go down or up.

4)            Delivery Trading

In Delivery Trading, as the name say, Traders have to take delivery of the shares and after getting these shares in their Demat account. In delivery trading, Traders need to have the amount required to buy shares, and don’t get margin amount as you get in day trading.

Fundamental and Technical analysis

Most investment and trading decisions are done with the help of two important tools.
1)            Fundamental Analysis

The name itself indicates that this analysis is totally based on companies’ fundamentals and is used to analyze the company fundamentals for mid-term to long term investment. Some analysts even use it for short term investment especially during the announcement of quarterly results.
Based on these terms and other fundamentals terms, the analysts predict the m

2)                   Technical Analysis

Technical analysis is the study of charts and historical data to predict the future movement of a share price. Technical analysis also takes into account volumes, support and resistance levels, technical indicators and other parameters which are useful to analyze the share price movements in short term or in day trading.

Strategies for day trading
No matter what anybody tells you, our belief is that the main strategy for day trading is firstly to protect your money, and then to earn consistent money.

Price Volatility
The Price volatility means the movement (up and down) of share price should be more (or high) throughout the day. In other words the fluctuation in share prices should be on high rate so that it will be easy for you to buy and sell on different prices. Suppose if share is moving up and down in very narrow range then on what price you will buy and sell? So it is always better if you choose shares which have high volatility in price movement.

Volume (quantity)
Volume means trading quantities. The shares which you choose for day trading should have high volumes (or high traded quantity). The high volume indicates that there is more liquidity. Liquidity means lots of transactions had took place on this share and more people are interested to trade in this share. This will ease your trading job because you will get more exposure to the price to buy and sell at anytime. Due to high volumes there could also typically be good price fluctuations as well.

Points to remember for day trading

It’s important to do practice or paper trading before you starts actual trading, so that you can become aware of how to place buy/sell orders, and gain confidence in yourself and your ability to execute trades
Short Selling

Traditionally the premise of investing is that you buy an asset and hold it until it rises enough to make a sizable profit, it doesn’t get much easier than that. If you knew that the stock was going to decline wouldn’t it be nice to be able to profit from its decline. Well you can profit from the decline of a stock and although it sounds easy, there are substantial risks and pitfalls that you need to watch out for. The mechanics of a short sale are somewhat complicated and the investor’s risks are high so it is important that you understand the transaction before getting into it.

What does it mean to sell short?
If you sell a stock you don’t own, you are selling short. (Yes, it’s legal.) You are now shorting the stock.

A short seller sells a stock that he believes will fall in value. A short seller does not own the stock before he sells it. Instead, he borrows it from someone who already owns it. Later, the short seller buys back the stock he shorted and returns the stock to close out the loan. If the stock has fallen in price since he sold short, he can buy the stock back for less than he received for selling it. The difference is his profit.

Short selling allows investors to profit from falling stock prices. “Buy low, sell high” is the goal of both short selling and purchasing shares (“going long”). A short sale reverses the order of a typical stock purchase: the stock is sold first and bought later.

For example, if you short 100 shares of Company X  at Rs. 1050 per share. The stock market crashes in and the share price falls to Rs. 1010 per share. You buy back 100 shares of Company X and close out the short sale. You gain the difference between the sales proceeds and the purchase costs and pockets Rs. 4,00 from the short sale, excluding transaction costs.

Where Does The Broker Get The Stock?

The short answer is from other customers or the Stock Holding Corp. of India.

Short selling is a marginable transaction. In plain English, that means you must open a margin account to sell short. This is the same account you would use if you want to use your stocks as collateral margin to trade in the markets.

When you open a margin account, you must sign an agreement with your broker. This agreement says you will maintain a cash margin or pledge your stocks as margin.

How Do You Sell Short?

Unlike a stock purchase transaction, which involves two parties (the buyer and the seller), short selling involves three parties: the original owner, the short seller, and the new buyer. The short seller borrows shares from the original owner, and immediately sells them on the open market to any willing buyer. To finalize (“close out”) the short sale transaction, the short seller must then go out into the stock market and buy the same amount of shares as he sold so that the broker can return them to the original owner.

To sell short you first must set up a margin account with your broker. A margin account allows you borrow from your brokerage company using the value of your portfolio as collateral. To sell a stock short, you must borrow stock. To initiate a short sale, you simply call up your broker and ask to sell short a specific number of shares of your selected stock. Your broker then checks with the Margin Department to see whether the shares are available or can be borrowed. If they are available, the brokerage borrows the shares, sells them in the open market, and puts the proceeds into your margin account. To close out your short sale, you tell your broker that you want to buy the same number of shares that you shorted. The broker will purchase the shares for you using the money in your margin account, return the shares and close out the short sale transaction.

While your short sale is outstanding, your account will be charged interest against the value of the short position. If the stock you shorted goes up in price, or the value of the stock you are using as collateral goes down in price, so that your collateral is less than the “maintenance” requirement you will be required to add money to your margin account or buy back the stock that you sold short. You must also pay any dividends issued by the company whose stock you sold short.

Why Sell Short?

The two primary reasons for selling short are opportunism and portfolio protection. Occasionally investors see a stock that they believe has been hyped to a ridiculously high level. They believe that the stock price will fall when reality replaces the hype. A short sale provides the opportunity to profit from the overpriced stock. Short sales are also used to protect an investor’s portfolio against a market downturn. By shorting stocks that the investor believes will fall sharply when the market as a whole falls, investors can help insulate the value of their portfolios against sudden market drops.

Short selling is also used to protect portfolios against erosion due to a broad market decline. Short sellers make money when stock prices fall. An investor can diversify a long portfolio by adding some short positions. The portfolio will then have positions that make money both when prices rise and when they fall. This reduces the volatility in the portfolio’s returns and helps protect the value of the portfolio when prices are falling.

By shorting carefully selected stocks that are priced near their peak but that will fall sharply if the market falls, an investor can use the profits from the short sales to help offset losses in his long position to protect the value of his portfolio.

Short selling just like long buying is essential for proper functioning of the stock market. It provides essential liquidity which in turn leads to proper price discovery.

Support & Resistance

Support and resistance represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying. As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control.

What is Support?

Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.

After a support level is penetrated, it often becomes a resistance level; this is because investors want to limit their losses and will sell later, when prices approach the former level.
What is Resistance?

Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. The logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.

After a resistance level is penetrated, it often becomes a support level; this is because buyers who didn’t buy at that price before it went up are now willing to buy at that price.

The concept of Support and Resistance is essential to understanding and interpreting the markets. Just as a ball bounces when it hits the floor or drops after being thrown to the ceiling, support and resistance define natural boundaries for rising and falling prices.

Buyers and sellers are constantly in battle mode. Support defines that level where buyers are strong enough to keep price from falling further. Resistance defines that level where sellers are too strong to allow price to rise further. Support and resistance play different roles in uptrends and downtrends. In an uptrend, support is where a pullback from a rally should end. In a downtrend, resistance is where a pullback from a decline should end.

Support and resistance are created because price has memory. Those prices where significant buyers or sellers entered the market in the past will tend to generate a similar mix of participants when price again returns to that level.

When price pushes above resistance, it becomes a new support level. When price falls below support, that level becomes resistance. When a level of support or resistance is penetrated, price tends to thrust forward sharply as the crowd notices the Breakout and jumps in to buy or sell. When a level is penetrated but does not attract a crowd of buyers or sellers, it often falls back below the old support or resistance. This failure is known as a False Breakout.

Support and resistance come in all varieties and strengths. They most often manifest as horizontal price levels. The length of time that a support or resistance level exists determines the strength or weakness of that level. The strength or weakness determines how much buying or selling interest will be required to break the level. Also, the greater volume traded at any level, the stronger that level will be.

Support and resistance exist in all time frames and all markets. Levels in longer time frames are stronger than those in shorter time frames.

How can Support & Resistant Levels help you make profitable trading decisions?

Identification of key support and resistance levels is an essential ingredient to successful and profitable trading. Being aware of the support and resistant levels of stocks and indices can greatly enhance analysis and forecasting abilities.

If a security is approaching an important support level, it can serve as an alert to be extra vigilant in looking for signs of increased buying pressure and a potential reversal. If a security is approaching a resistance level, it can act as an alert to look for signs of increased selling pressure and potential reversal.

If a support or resistance level is broken, it signals that the relationship between supply and demand has changed. A resistance breakout signals that demand (bulls) has gained the upper hand and a support break signals that supply (bears) has won the battle.