Advantages & Disadvantages of Intraday Trading

Introduction

Despite being the riskiest of all types of trading in the stock market, intraday trading might also be the most rewarding if you know the tricks of the trade. This article defines the real meaning and discusses the top-3 benefits and disadvantages of intraday trading. Read on to know more. 

What is Intraday Trading?

Intraday trading refers to buying and selling stocks, commodities, currencies, ETFs, derivatives, etc., on the same day. Since there is no holding after the market closing, intraday traders are also known as day traders. Intraday traders create two types of positions in the market - buy and sell. They may either buy in the morning and sell before market closing or sell in the morning and buy before market closing. Intraday traders benefit from the momentum of stocks and their volatility.

If you want to work as an intraday trader, ensure to place the target and stop loss soon after executing the trade. Since intraday price movement can be really sharp, the stop loss can minimise the damage to a great extent.  

The Top-3 Pros of Intraday Trading

Here are the Significant Benefits of Intraday Trading:

1. Let Leverage Work For You 

Leverage in the stock market is much like a bank loan. Intraday traders often use leverage to increase the amount of profit. The bank evaluates your financial profile and approves the loan amount. Similarly, in the stock market, a broker evaluates your shareholding record and cash availability status to approve a margin amount. The margin can be between five times and ten times the available cash in your trading account. So, if your broker gives you a margin of ten times, you can buy stocks worth INR 1 lakh with an investment of INR 10,000.

2. Minimise Overnight Risks

Stock prices move for several reasons, including the company’s financial results, business prospects, industry status, and many macroeconomic factors. Moreover, if any negative geopolitical or environmental news emerges after the market closes, the next day’s market might remain red. However, intraday traders rarely concern themselves with such things, as whatever they do, they do in a day. Once the market closes, they can put their worries behind them and stay calm. In fact, no negative news can affect their sanity and money after the market closes.  

3. Sell First Buy Later

Generally, positional traders buy stocks first and sell later. However, intraday trading allows you to sell stocks first and buy them later. Hence, you can also trade and profit efficiently in a bear market. Although futures and options also let you profit through short-selling, capital requirements are often higher than intraday trading. Hence, if you want to apply the ‘sell first buy later’ strategy to profit, intraday trading might be your best bet.

The Top-3 Cons of Intraday Trading

Here are the Top-3 Disadvantages of Intraday Trading:

1. High-Risk High-Reward

While most traders accept that intraday trading is one of the most rewarding forms of trading, they do not ignore that it is also the riskiest. An intraday trader needs sharp observational skills and must understand the market properly. Although it is challenging to establish yourself as an intraday trader, it becomes easy once you understand the rules.

An intraday trader generally follows two techniques - price-action and technical indicators. Price-action traders draw support and resistance lines on the chart to identify the entry and exit points. Conversely, technical traders rely on technical indicators, such as RSI, MACD, DMA, SMA, and the like, to find trading opportunities. Hence, proper research is vital to minimise the risks of intraday trading.   

2. Time-Intensive

Intraday trading is a complex art. And, unlike positional or long-term trading, you cannot leave your computer or mobile app before closing a trade. Although you can place a target and stop loss and get back to your full-time work, this cannot be a viable model in the long run. Sometimes, a stock may hit the stop loss before eventually hitting the target. Or it may return from a stone’s throw from the target price and hit the stop loss. Staying hooked to the price action may help you avoid such problems and trade like a professional

3. Extreme Volatility May Make You Nervous

You may find a stock moving wildly in the 1-minute, 3-minutes, or 5-minutes chart. But, when you look at a 30-minutes chart or a daily chart, the movements will appear more streamlined and predictable. Hence, staying away from intraday trading might be a sensible decision if you do not like volatility.

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