There is an inherent financial risk in intraday trading, whether you are a new trader or a seasoned one. As an intraday trader, you can address these risks and mitigate them substantially, if not completely. If you are new to intraday trading, you must know what can go wrong in a trade and how you can avoid it.
Risks involved in intraday trading
Behind every intraday success story are factors like the right stock selection, a correct reading of market volatility, accurate entry and exit timing, and the right temperament. The inherent risk is the probability of one or some of these factors turning unfavorable.
Picking the wrong stock: An intraday trader will select stocks after careful research. He may also rely on the analysis provided by his full-service broker. Chances of loss arise when the trader picks a weak or unpredictable stock.
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Volatility: Even when you pick the right stock, the stock may perform poorly due to market dynamics. For instance, as the COVID-19 pandemic became imminent, many reliable stocks fell sharply. So, you have to keep an eye on the market sentiments as well.
Stay in the market: There is always a risk that you might end up overstaying in the market. This happens when the intraday trader holds on with the expectation that the loss will get recovered, or the profit will increase further. Regular traders decide on profit and loss levels beyond which they stop their trade.
Temperament: The right temperament for a trader is steadiness under pressure. The risk here is getting swayed by public sentiments or emotions. Intraday trading must be driven by research and strategies, and not by emotional choices.
Intraday risk management tools and strategies
Intraday traders choose a fixed landmark within which they trade. The techniques, "Stop Loss" and "Take Profit" help you to earn intraday profit while minimising the risk attached.
Take Profit: Let’s assume that you have bought a share at Rs 100. You are happy with an earning of Rs 10 but don’t want to lose more than Rs 5. A take-profit order will ensure that the trade gets closed as soon as your desired profit level is achieved. In this example, your take-profit order will be set at Rs 110 per share.
Stop Loss: Going back to the above example, you can set a stop loss at Rs 95 per share. Once the stock falls by Rs 5, your trade automatically closes and the stocks get sold.
Trailing stop loss: A trailing stop loss order helps a trader to conserve profit. With a trailing stop loss, the trade remains active as long as the market movement is in your favour. When the stock price peaks and starts sliding, the trailing stop loss gets activated, which then triggers a sale of the stocks.
Support and resistance: Analysts can predict the range between which stock is expected to be traded. Let’s assume that a stock price is currently trading at Rs 100, and has a support at Rs 85 and resistance at Rs 135. You can base your stop loss and take profit levels based on the support and resistance prices predicted by your trusted analysts or brokerage house.
Candlesticks: Candlesticks visually represent the fluctuations in the share price. Traders can read the candlestick patterns to predict the short-term movement of the stock as well as its potential direction. These patterns act as a reference point in intraday trading decisions.
Conclusion
Strong knowledge, meticulous research and swift decision-making are the hallmarks of successful intraday trade. With these elements, it is important to utilise the risk mitigation strategies smartly, so that you manage to keep your losses at bay.
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