Intraday trading has gained significant popularity among traders recently. It refers to a trading style where stocks are bought and sold within the same day. All positions are closed by the market’s closing time, ensuring no exposure overnight. While intraday trading can be highly profitable when done correctly, it requires an in-depth understanding of market trends, strategies, and the ability to make rapid decisions.
Content
- What is Intraday Trading and How It Works?
- What is Intraday Trading with Example
- Intraday Trading Meaning
- What is Intraday Trading Investing?
- Intraday Trading for Beginners
- Intraday Trading Tips
- Learn Intraday Trading
- Intraday Trading Charges
- Basics of Intraday Trading
- Intraday Trading Rules
- Intraday Trading Time
- Tax on Intraday Trading
- Intraday Trading Benefits and Disadvantages
- Conclusion
- FAQs
What is Intraday Trading and How It Works?
Intraday trading involves buying and selling stocks or other financial assets within a single day. The goal is to take advantage of short-term price changes. Unlike long-term investors, who hold positions for extended periods, intraday traders aim to profit from small price movements during the day. All positions are closed before the market closes, avoiding overnight exposure to volatility.
What is Intraday Trading with Example
Let’s consider a simple example: You buy 100 shares of XYZ stock at ₹500 each at 10:00 AM. By 3:30 PM, the price rises to ₹520, and you sell the shares. Your profit is ₹20 per share, totaling ₹2,000. However, it’s important to account for brokerage fees, taxes, and other transaction charges as they impact your final profit.
Intraday Trading Meaning
Intraday trading is highly time-sensitive. Unlike traditional stock investing, where you hold stocks for a long time, intraday trading requires fast reactions to market changes. Traders must be prepared to buy and sell quickly, ensuring all trades are completed before the market closes.
What is Intraday Trading Investing?
Intraday trading differs from traditional investing, where you buy stocks and hold them for long-term growth. In contrast, intraday trading focuses on making profits from short-term price changes. It’s about capitalizing on immediate market fluctuations rather than waiting for a company’s long-term growth.
Intraday Trading for Beginners
Step 1: Understanding Basic Concepts
Beginners should start by understanding the basics of the stock market, including how it operates, the importance of liquidity, and how trends affect stock prices.
Step 2: Choosing the Right Stocks
Select stocks with high liquidity, meaning they can be easily bought or sold without drastically affecting the price. Volatile stocks are also beneficial, as they provide more opportunities for price movements.
Step 3: Setting Up a Trading Account
To trade, you’ll need to open a trading account with a broker. Make sure your platform provides advanced charting tools and real-time data to assist with trading decisions.
Step 4: Using Technical Analysis
Intraday traders rely on technical analysis, analyzing charts and identifying patterns to predict price movements. This helps traders decide when to enter or exit trades.
Intraday Trading Tips
Tip 1: Set Stop-Loss Limits
Set stop-loss limits to minimize potential losses. This automatic action sells your stock if it reaches a specific price, protecting your investments.
Tip 2: Trade in Liquid Stocks
Only trade in stocks with high liquidity, as they allow fast entry and exit, minimizing price fluctuations.
Tip 3: Avoid Volatile Markets
Refrain from trading in highly volatile markets unless you have a clear plan. Unpredictable volatility can lead to substantial losses.
Tip 4: Practice Discipline
Maintaining discipline is essential. Stick to your trading strategy and avoid impulsive decisions that can result in mistakes.
Learn Intraday Trading
To become proficient in intraday trading, continuous learning is crucial. Some resources include:
- Books: Titles like The Psychology of Trading by Brett N. Steenbarger offer deep insights into the mental aspects of trading.
- Online Courses: Platforms like Udemy and Coursera provide comprehensive intraday trading courses.
- Simulators: Practice intraday trading with virtual money using trading simulators before using actual funds.
Intraday Trading Charges
Intraday trading involves various charges, which can reduce your overall profitability. Here’s a breakdown of typical charges:
Brokerage Fees
Brokers charge fees when buying or selling stocks. This fee can be either flat or a percentage of the trade value, depending on the broker and platform.
Securities Transaction Tax (STT)
STT is a tax imposed by the government on the buying and selling of securities. In intraday trading, STT is charged only on the selling side.
Goods and Services Tax (GST)
GST is charged on the brokerage fee and other service charges. It’s currently set at 18% in India.
Stamp Duty
This duty is based on the transaction value and varies depending on the state from which you are trading.
Transaction Charges
Exchanges like NSE or BSE impose transaction fees for both buying and selling stocks.
Exchange Transaction Charges
Stock exchanges also charge transaction fees, which vary between exchanges.
Other Miscellaneous Charges
- Depository Participant (DP) Charges: Fees associated with holding securities in dematerialized form.
- Turnover Charges: Charges based on the total value of stocks bought or sold during intraday trading.
How Charges Impact Profitability
These charges reduce your net profit. For example, if you make ₹1,000 profit but incur ₹500 in charges, your net profit is ₹500. Intraday traders must factor in these costs, as frequent trades can significantly impact overall profitability.
Basics of Intraday Trading
Intraday trading focuses on short-term price movements within a single trading day. The following are key elements of this trading style:
- Leverage: Traders borrow funds to increase their position size. While leverage amplifies profits, it also raises the risk of loss.
- Margin Trading: In margin trading, brokers offer a margin account, allowing traders to borrow money to trade. However, losses can exceed the initial capital.
- Stop-Loss Orders: A stop-loss order helps traders limit losses by automatically closing a position at a predetermined price.
- Entry and Exit Strategies: Traders must have clear strategies for entering and exiting trades, based on technical analysis, patterns, and indicators.
Risk Management
Effective risk management is essential for success in intraday trading. Traders should:
- Set stop-losses to limit losses.
- Use position sizing to risk only a small percentage of their capital (e.g., 1-2%).
- Diversify their investments across various stocks or sectors to spread risk.
Importance of Market Volatility
Intraday trading thrives on market volatility, which offers opportunities for price swings. However, high volatility also increases the risk of loss, so traders must balance risk with opportunity.
Time Frame
In intraday trading, time is crucial. Traders often work on shorter time frames, such as 1-minute, 5-minute, or 15-minute charts. These provide real-time data, helping traders make rapid decisions. Understanding optimal trading times, often during the first and last hours of the day, can enhance profitability.
Intraday Trading Guidelines
Intraday trading demands a strong grasp of specific rules and principles to succeed. These guidelines are created to help traders control risks, make informed choices, and prevent unnecessary losses. Let’s examine the essential intraday trading rules that every trader must follow:
Close Positions Within the Day
A key principle of intraday trading is that all positions must be squared off before the market ends. This means buying and selling stocks within the same day, as intraday trading does not involve holding positions overnight. Any open positions at the end of the day may be squared off by the broker, potentially at a loss.
Establish Stop-Loss Limits
Implementing a stop-loss is vital in intraday trading to limit losses if the market moves against you. A stop-loss order automatically closes a trade when a stock reaches a predetermined price. For instance, if you buy a stock at ₹200 and set a stop-loss at ₹195, the trade will close automatically if the price drops to ₹195, thus minimizing the loss.
Trade in Liquid Stocks
Liquidity refers to how easily a stock can be traded without significantly impacting its price. In intraday trading, it’s crucial to focus on stocks with high liquidity to ensure quick entries and exits. Stocks with low liquidity can experience larger price swings, making it difficult to sell at the desired price.
Avoid Emotional Trading
Emotions such as fear and greed can cloud decision-making and lead to poor trades. Intraday traders must stay disciplined, follow their plan, and avoid letting emotions control their actions. Relying on technical analysis and market trends, instead of emotions, is critical for success.
Use a Trading Strategy
A solid trading strategy should outline your risk tolerance, approach, entry/exit points, and target profit. Following a structured strategy keeps you disciplined and prevents impulsive actions. Successful traders consistently use a plan that guides their trades.
Don’t Trade During High Volatility Without a Strategy
Market volatility can create opportunities but also brings higher risks of sudden price changes. If trading during highly volatile times, like major economic announcements or news, ensure a clear strategy is in place. Avoid speculative trading in such moments unless you’ve thoroughly analyzed the market conditions.
Adhere to Risk-Reward Ratios
Before entering a trade, assess the risk and reward potential. A common risk-reward ratio in intraday trading is 1:2, meaning you’re willing to risk ₹1 to earn ₹2. This ensures that even if some trades result in losses, your overall gains can still be substantial.
Monitor Market Trends
Stay informed about market news, trends, and global events. Intraday traders need to be aware of factors affecting stock prices, such as economic reports, earnings announcements, or geopolitical events. Regularly tracking the news helps traders anticipate price movements and make informed choices.
Avoid Overtrading
Overtrading refers to executing excessive trades driven by the excitement of quick profits. However, this increases transaction costs, raises risk, and leads to emotional exhaustion. It’s better to focus on quality trades with a clear strategy rather than attempting too many trades without proper analysis.
Maintain a Trading Log
Keeping a record of your trades, including the reasons for entering and exiting, profits or losses, and strategies used, can help you learn from past experiences. Reviewing your trades periodically can reveal patterns and help refine your strategies.
Follow Market Hours
In India, the stock market operates from 9:15 AM to 3:30 PM. The majority of trading activity occurs during the first and last hour of the session. The middle of the day tends to have lower volatility, which might offer fewer opportunities. Be mindful of market hours and focus on the most active periods.
Don’t Hold on to Losing Trades
It’s tempting to hold a losing position in hopes of a market reversal. However, this can lead to greater losses. It’s essential to cut your losses early and move on to new opportunities rather than allowing emotions to dictate your choices.
Stay Disciplined
Successful intraday traders maintain strict discipline. They stick to their strategies, avoid impulsive actions, and don’t chase the market. Adhering to stop-loss limits, target prices, and trading plans will keep you focused even when market conditions are unpredictable.
Handle Leverage Cautiously
Leverage enables you to trade with borrowed money but also amplifies the risk. Although leverage can boost profits, it can also result in considerable losses if the market moves unfavorably. Use leverage only if you understand the risks and are comfortable with them.
Best Time for Intraday Trading
In India, optimal intraday trading hours are from 9:15 AM to 3:30 PM. The market is most active during the opening and closing hours, making these times the most volatile for trading. Many traders prefer these hours to capitalize on rapid price changes.
Tax Implications of Intraday Trading
Intraday trading is taxed differently from long-term investing. Since positions are bought and sold on the same day, tax authorities treat intraday trading as a speculative business activity, which has specific tax consequences every trader should understand.
Intraday Trading as Speculative Income
In India, profits from intraday trading are classified as speculative income. Unlike long-term investments, which are subject to capital gains tax, intraday trading profits are taxed as business income, as the positions are not held overnight and are considered speculative.
Tax Rate on Intraday Trading
The tax rate on intraday trading profits is based on the individual’s income tax bracket. The earnings from intraday trading are added to the total income for the year and taxed according to the applicable slab:
- Up to ₹2.5 lakh: No tax
- ₹2.5 lakh to ₹5 lakh: 5%
- ₹5 lakh to ₹10 lakh: 20%
- Above ₹10 lakh: 30%
Traders must include speculative income in their taxable income to determine the applicable tax rate.
Loss Deductions
Losses from intraday trading are categorized as speculative losses. These can only be offset against speculative gains, not other types of income like salary or business income. However, speculative losses can be carried forward for up to four years to be set off against future speculative gains.
Deductions for Expenses
Since intraday trading is treated as business income, certain directly related expenses can be deducted. These include:
- Brokerage charges
- Transaction fees
- Internet and utility bills used for trading
- Depreciation on equipment like computers These deductions help lower the taxable income from intraday trading.
Securities Transaction Tax (STT)
Securities Transaction Tax (STT) is a tax applied to every transaction of securities on the Indian stock exchanges. For intraday trades, STT is levied only on the selling side at 0.025% of the sale value. While STT is not linked to income tax, it increases the overall cost of trading, reducing profit margins.
GST on Intraday Trading
Goods and Services Tax (GST) is not applicable to intraday trading profits. However, GST is charged on brokerage and other fees, with a rate of 18% on financial services. This tax is applied to brokerage and transaction charges, not profits or losses.
Advance Tax for Intraday Traders
If you anticipate significant profits from intraday trading, you must pay advance tax in installments throughout the year, rather than in one lump sum. The due dates for advance tax are:
- 15th June: 15% of the estimated liability
- 15th September: 45% of the estimated liability
- 15th December: 75% of the estimated liability
- 15th March: 100% of the estimated liability
Failure to pay advance tax can result in interest penalties under Sections 234B and 234C of the Income Tax Act.
Filing Intraday Trading Income
Traders need to report their intraday trading income using the ITR-3 form, which is for individuals with income from business or profession. Since intraday trading is treated as speculative business income, it’s essential to keep accurate records of trades, profits, losses, and expenses when filing returns.
Tax Audit Requirement
If the total turnover from intraday trading exceeds a certain threshold, traders may be required to undergo a tax audit. For intraday trading, turnover is calculated as the sum of absolute profits and losses for each trade. A tax audit is mandatory if:
- Total income exceeds ₹2.5 lakh, and
- Trading turnover is over ₹10 crore for FY 2023-24 (if no digital transactions are involved). Even if turnover is below ₹10 crore, a tax audit may still be required if the profit margin is less than 6%.
Short-Term Capital Gains Tax vs. Speculative Income
Many traders confuse intraday trading with short-term capital gains (STCG). STCG applies only to trades where positions are held for more than a day but less than 12 months. Intraday trading, however, is classified as speculative income, and the tax treatment differs significantly.
Intraday Trading Pros and Cons
Intraday trading, where positions are bought and sold within the same day, is popular among active market participants. However, it has both benefits and drawbacks that traders should be mindful of before engaging in this fast-paced strategy. Below are the main advantages and disadvantages of intraday trading.
Benefits of Intraday Trading
- Potential for Quick Gains: Intraday trading offers the chance for rapid profits by capitalizing on small price fluctuations throughout the day.
- No Overnight Risks: Unlike long-term investors, intraday traders avoid overnight risks like earnings reports or political events, since they close all positions before the day ends.
- Leverage: Intraday traders can use margin to leverage their capital, potentially amplifying profits.
Drawbacks of Intraday Trading
- High Risk: The fast-paced nature of intraday trading can lead to significant losses if the market moves unfavorably.
- Emotional Stress: Intraday trading requires intense focus and can cause emotional strain, especially during volatile market conditions.
- Requires Skill and Experience: Success in intraday trading is dependent on strategy, market knowledge, and discipline. Beginners may face difficulties in managing risks effectively.
Conclusion
Following the rules of intraday trading and understanding the tax and legal aspects are crucial to making informed and successful trading decisions. Always focus on risk management, discipline, and strategies to maintain a profitable approach. Intraday trading can be lucrative for experienced traders, but it requires constant attention to detail and market conditions.
FAQs
Can I earn ₹5000 a day in intraday trading?
Yes, earning ₹5000 or more in intraday trading is achievable. However, it depends on several factors like:
- Initial capital
- Stocks selected
- Market conditions
- Trading strategy
It’s important to remember that higher returns come with higher risks. Success in intraday trading requires experience, discipline, and effective risk management.
Can I buy 10,000 shares in intraday?
Yes, you can buy 10,000 shares in intraday trading if:
- You have the necessary margin or funds in your account.
- Your broker provides margin leverage, allowing you to trade larger quantities than your capital permits.
However, consider the liquidity of the stock and ensure you can sell the shares quickly to minimize risks.
Is intraday trading safe?
Intraday trading carries inherent risks due to high price volatility within a single day. To enhance safety:
- Develop a solid strategy.
- Use stop-loss orders to minimize losses.
- Avoid emotional decisions.
While experienced traders manage these risks effectively, beginners may face significant challenges and potential losses.
Can I convert intraday to delivery?
Yes, intraday trades can usually be converted to delivery if:
- Your broker allows it.
- You have enough funds to cover the full cost of the shares.
This option is helpful if you decide to hold the shares beyond the trading day. Always check your broker’s policies before making such a move.
How much can I earn in intraday trading?
There’s no fixed earning potential in intraday trading. Your results depend on:
- Initial capital
- Risk tolerance
- Trading strategy
- Market behavior
While some traders achieve consistent profits, others may face losses. Focusing on learning, discipline, and risk management is critical for long-term success.