Lesson 10: Intra-Day Trading
Intraday trading involves buying and selling of stocks within the same trading day.
Here stocks are purchased, not with an intention to invest, but for the purpose of
earning profits by harnessing the movement of stock indices. Thus, the fluctuations
in the prices of the stocks are harnessed to earn profits from the trading of stocks.
An online trading account is used for the purpose of intraday trading. While doing
intraday trading, you need to specify that the orders are specific to intraday trading.
As the orders are squared off before the end of the trading day, it is also called as
Intraday Trading.
Intraday trading deals with buying and selling of stocks on the same day, during the
trading hours that are stipulated by the exchange. Stocks are bought and sold in
large numbers strategically with the intention of booking profits in a day.
Let’s explain Intraday trading with an example:
Suppose that you have bought 100 stocks of ABC limited during the open market
hours, then you have to sell the same no. of stocks of ABC limited before market
closure. Same is the case if you have sold the stocks, you have to buy the same
quantity of the stock you have sold earlier.
#How to Go About Intraday Trading
It is important to understand the fundamentals of intraday trading in order to make
consistent profits. A good tip is to trade with the current market trend. If the market is
falling, sell first and buy later, and vice versa. Make an intraday trade plan and stick
to the plan. Set your desired profit and stop-loss limit. Do not be greedy. Instead,
book your profits at regular intervals. Maintain stop-loss levels. It helps you to limit
your loss if the market does not perform. Also, choose highly liquid shares and trade
in a small number of shares at a time, if you are not a seasoned trader.
#Basic Rules of Intraday Trading
An unexpected movement can wipe all your investment in a few minutes. Hence, it is
important to keep in mind a few intraday trading basics while carrying out intraday
trading. Do not trade in the first hour as the opening range is established during that
time. The fluctuations of this range can help to identify the intraday trend. Move with
the market trend as it allows potential for a greater profit if the trend continues.
Another basic rule is to fix entry price and target levels. Set a stop-loss limit so that
your losses will be curtailed if the share drops. Also, withdraw if your desired profits
are met. Stick to your plan and carry trade in a disciplined manner.
#Here are some few take away points to keep in mind while doing intraday
trading:
Intraday Trading Tips
Intraday trading is riskier than investing in the regular stock market. It is important,
especially for beginners, to understand the basics of such trading to avoid losses.
Individuals are advised to invest only the amount they can afford to lose without
facing financial difficulties. A few intraday trading tips will help you learn the art of
trading.
Intraday Trading indicators
When it comes to booking profits in intraday trading, you will require to do a lot of
research. For the same purpose, you need to follow certain indicators. Often intraday
tips are believed to be the Holy Grail; this, however, is not entirely accurate. Intraday
trading indicators are beneficial tools when used with a comprehensive strategy to
maximize returns.
How to make profit in intraday trading
Intraday traders always face inherent risks that exist in the stock markets. Price
volatility and daily volume are a couple of factors that play an important role in the
stocks picked for daily trading. Traders must not risk over two per cent of their total
trading capital on a single trade to ensure the right risk management.
Intraday Time Analysis
When it comes to intraday trading, daily charts are the most commonly used charts
that represent the price movements on a one-day interval. These charts are a
popular intraday trading technique and help illustrate the movement of the prices
between the opening bell and closing of the daily trading session.
How to Choose Stocks for Intraday Trading
To succeed as a day trader, it is important to know how to pick stocks for intraday
trading. Often people are unable to make profits because they fail to select
appropriate stocks to trade during the day. Choosing the right stocks to book profits
is an art that you will learn with experience.
#Price Gaps
A price gap is a change in price levels between the close and open of two
consecutive days. Although most technical analysis manuals define the four types of
gap patterns as Common, Breakaway, Continuation, and Exhaustion, those labels
are applied after the chart pattern is established. That is, the difference between any
one type of gap from another is only distinguishable after the stock continues up or
down in some fashion. Although those classifications are useful for a longer-term
understanding of how a particular stock or sector reacts, they offer little guidance for
trading.
For trading purposes, we define four basic types of gaps as follows:
A Full Gap Up occurs when the opening price is greater than yesterday's high price.
In the chart below for Cisco (CSCO), the open price for June 2, indicated by the
small tick mark to the left of the second bar in June (green arrow), is higher than the
previous day's close, shown by the right-side tick mark on the June 1 bar.
A Full Gap Down occurs when the opening price is less than yesterday's low. The
chart for Amazon (AMZN) below shows both a full gap up on August 18 (green
A Partial Gap Up occurs when today's opening price is higher than yesterday's
close, but not higher than yesterday's high. The next chart for Earthlink (ELNK)
depicts the partial gap up on June 1 (red arrow), and the full gap up on June 2
(green arrow).
A Partial Gap Down occurs when the opening price is below yesterday's close, but
not below yesterday's low. The red arrow on the chart for Offshore Logistics (OLG),
below, shows where the stock opened below the previous close, but not below the
previous low.
Summarily, price gaps occur when a security’s opening price differs from the
previous day’s closing price, When the opening price is lower than the previous day’s
closing price it is known as a Gap Down, When the opening price is higher than the
previous day’s closing price it is known as a Gap Up. Price gaps can occur because
of:
Company announcements;
Market announcements;
News; etc.
#Gap Trading Strategies
The eight primary gap trading strategies are as follows:
Full Gaps
● Full Gap Up: Long
If a stock's opening price is greater than yesterday's high, revisit the 1-minute chart
after 10:30 AM and set a long (buy) stop two ticks above the high achieved in the
first hour of trading. (Note: A 'tick' is defined as the bid/ask spread, usually 1/8 to 1/4
point, depending on the stock.)
● Full Gap Up: Short
If the stock gaps up, but there is insufficient buying pressure to sustain the rise, the
stock price will level or drop below the opening gap price. Traders can set similar
entry signals for short positions as follows:
If a stock's opening price is greater than yesterday's high, revisit the 1-minute chart
after 10:30 AM and set a short stop equal to two ticks below the low achieved in the
first hour of trading.
● Full Gap Down: Long
Poor earnings, bad news, organizational changes and market influences can cause
a stock's price to drop uncharacteristically. A full gap down occurs when the price is
below not only the previous day's close, but the low of the day before as well. A
stock whose price opens in a full gap down, then begins to climb immediately, is
known as a “Dead Cat Bounce.”
If a stock's opening price is less than yesterday's low, set a long stop equal to two
ticks more than yesterday's low.
● Full Gap Down: Short
If a stock's opening price is less than yesterday's low, revisit the 1-minute chart after
10:30 AM and set a short stop equal to two ticks below the low achieved in the first
hour of trading.
The difference between a Full and Partial Gap is risk and potential gain. In general, a
stock gapping completely above the previous day's high has a significant change in
the market's desire to own or sell it. Demand is large enough to force the market
maker or floor specialist to make a major price change to accommodate the unfilled
orders. Full gapping stocks generally trend farther in one direction than stocks which
only partially gap. However, a smaller demand may just require the trading floor to
only move price above or below the previous close in order to trigger buying or
selling to fill on-hand orders. There is a generally a greater opportunity for gain over
several days in full gapping stocks.
If there is not enough interest in selling or buying a stock after the initial orders are
filled, the stock will return to its trading range quickly. Entering a trade for a partially
gapping stock generally calls for either greater attention or closer trailing stops of
5-6%.
● Partial Gap Up: Long
If a stock's opening price is greater than yesterday's close, but not greater than
yesterday's high, the condition is considered a Partial Gap Up. The process for a
long entry is the same for Full Gaps in that one revisits the 1-minute chart after 10:30
AM and set a long (buy) stop two ticks above the high achieved in the first hour of
trading.
● Partial Gap Up: Short
The short trade process for a partial gap up is the same for Full Gaps in that one
revisits the 1-minute chart after 10:30 AM and sets a short stop two ticks below the
low achieved in the first hour of trading.
● Partial Gap Down: Long
If a stock's opening price is less than yesterday's close, revisit the 1-minute chart
after 10:30 AM and set a buy stop two ticks above the high achieved in the first hour
of trading.
● Partial Gap Down: Short
The short trade process for a partial gap down is the same for Full Gap Down in that
one revisits the 1-minute chart after 10:30 AM and sets a short stop two ticks below
the low achieved in the first hour of trading.
If a stock's opening price is less than yesterday's close, set a short stop equal to two
ticks less than the low achieved in the first hour of trading today. If the volume
requirement is not met, the safest way to play a partial gap is to wait until the price
breaks the previous high (on a long trade) or low (on a short trade).
#Trading System – example with S&P 500
A trading system is a group of specific parameters that combine to create buy and
sell signals for a given security. Trading systems can be developed using many
different technologies, including Microsoft Excel, MATLAB®, TradeStation, R,
Python, and other platforms and languages. The buy and sell signals from these
platforms may appear in a file for you to execute or be programmatically executed
using a brokerage that supports automated trading.
There are countless different inputs that can be used when building trading systems.
Technical indicators are the most common, but many trading systems incorporate
fundamental data, such as revenue, cash flow, debt-to-equity, or other financial
ratios. Others even incorporate news, tweets, and other data from around the web
that could provide a signal. The only requirement is that the data must be
represented in a way that a computer can analyze.
A trading system is a set of rules that can be based on technical indicators or
fundamental analysis. A trading system tells the trader when and how to trade. In
many cases, a trading system is like a blueprint for trading.
A trading system is important for a trader because without it, there is no way a trader
can expect to trade. Despite getting lucky a few times, one cannot expect to remain
consistently profitable without following a trading system or a strategy.
Gap & Go:
The gap and go strategy is when a stock gaps up from the previous days close price.
If you’re looking to do gap trading successfully then the most common strategy is to
use a pre-market gap and go scanner and search for stocks that have volume in the
premarket.
Gap Trading Rules:
Here are four rules to keep in mind when you have a gap:
A gap up in price, into supply, after a rally in price, and in the context of a downtrend,
is a very high-probability shorting opportunity
A gap up in price, and in the context of an uptrend, is a lower-probability shorting
opportunity and can actually be a buying opportunity on a pullback to demand when
there is a significant profit margin above
A gap down in price, into demand, after a decline in price, and in the context of an
uptrend, is a very high-probability buying opportunity
A gap down in price, and in the context of a downtrend, is a lower-probability buying
opportunity and may in some cases be a shorting opportunity after a rally into supply
when there is a significant profit margin below. Other rules include:
✓ Gap larger than 3% (5% for well-known companies)
✓ Daily volume >2 million shares
✓ Use 1-minute candles
✓ Risk = Reward 1:1
✓ 75% partial of 400 shares or more
✓ Ignore dual traded stocks