Intraday trading accounts for more than 70
% of the cash market trading on any average day in India. Only the balance is accounted for by delivery. The reasons are quite a few. Firstly, intraday trading can be leveraged with the help of margins and the position can be closed out the same day. Secondly, intraday trading permits you to short sell the stock without delivery and cover it by evening by paying a small margin. To understand the nuances of intraday trading you need to learn intraday trading secrets of managing margins. How to make profit in intraday trading is largely about how efficiently you manage your margins. Let us see how to use successful intraday trading strategies using margins and also at some tips and tricks of intraday trading.
Trading intraday on margins
When you buy a stock for delivery, the broker will not only insist on margins but also that you pay the full amount by end of the day or latest by T+1 date. However, if you do not intend to take delivery, you can actually trade intraday by just putting up a margin. How much margin should you pay on an intraday position? There are 2 types of margins that you need to understand here.
Data Source: NSE
- SPAN margin is also called volatility margin and is based on the concept of Value-at-risk (VAR). This margin calculates the probability of loss on more than 99
% of the trading days. This will vary by stocks based on the volatility of the stock prices.
- Exposure margins or Extreme Loss Margins (ELM) is additionally imposed on the intraday trader as an extreme protection measure. It is not compulsory to collect these margins but most brokers do collect these margins from traders as a measure of abundant caution. The sum total of SPAN margin and ELM margins becomes your Initial Margin for the purpose of intraday trading.
As can be seen from the above NSE table, the total initial margin (VAR + ELM) for Reliance Industries is Rs.1,19,300 which is 12.5
% margin that you are required. That virtually gives you 8X leverage for intraday trading and that is a good leverage that you can extract. By investing Rs.1.19 lakhs you can effectively take positions worth Rs.9.54 lakhs. But that is more because RIL is not a very volatile stock. What happens if you select a highly volatile stock to trade intraday?
Data Source: NSE
Let us now go around to a more volatile stock like PC Jewellers that has been extremely volatile in the last few months. Here to take a position worth Rs.1.71 lakhs, you need to pay an Initial Margin of Rs.1.18 lakhs. That means you pay a margin of nearly 69
% and effectively you get a trading leverage of just 1.45X. Obviously, that will discourage you from day trading in the stock, which is what the exchange wants as they are keen to curb speculation in certain volatile stocks.
Using MIS orders for best margin leverage
When we select the Margin Intraday Square-off (MIS) option while placing an order, your order is automatically classified as an intraday order. This will entitle you to the entire margin facility that the NSE offers and, at times, even more. That is because, the brokers are not obliged to collect the ELM margin and only the VAR margin is mandatory. In the above case of Reliance Industries, you can get leverage to the tune of 14X if the broker does not insist on collecting ELM margins. The first point is to clearly select that you want to place an MIS order so that you are automatically eligible for higher margins. Secondly, select stocks that are less volatile and hence give higher leverage. For example you can get leverage of over 10X in stocks like Reliance, HUVR, and Infosys etc. Speculative stocks are not only more risky but also entail higher margins.
An important point to remember is that all MIS orders have to be necessarily closed intraday. The broker runs a MIS check after 3.15 pm and any open intraday positions are automatically squared off. However, the onus of any open positions not closed out is entirely on the trader.
Getting better intraday leverage with Cover Orders and Bracket Orders
When you place an intraday order with a compulsory stop loss order tagged to it, then it becomes a Cover Order (CO). If you place a simultaneous stop loss order and a profit booking order, then it is called a Bracket Order (BO). The CO and BO orders are essentially risk management mechanisms. They define your risk on either side and reduce the risk for the trader and the broker. As a result, the broker is willing to give you higher leverage if you place the intraday order as a CO order or a BO order. The margin leverage offered for CO and BO orders is normally twice that of the MIS intraday order. So if you are getting 10X leverage on a stock under the MIS order facility, then your leverage can go up to 18-20X if you convert your order into CO/BO order.
Intraday trading is all about managing your risk and getting the best possible leverage on your margins. Smart use of MIS orders and BO/CO orders can go a long way in helping you manage your intraday margins more efficiently.