How to Calculate Stop Loss in Intraday Trading?

If you have been into intraday trading, you perhaps know that losses are an inevitable part of trading. There is no holy grail in the stock market that works like a charm. Every setup has its efficacy and none of the trade setups work with 100% accuracy. So what does that leave us with? Well, the most important aspect that comes into trading successfully for the long term is managing the losses. As intraday traders, you cannot avoid the risk of loss completely. All you can do is manage it well so that it stays in your pocket size and does not draw down your capital in the long run.

So, how do you manage the risk? There are various ways that include position sizing, which means you must trade in the quantity that you can manage. Trading in large volumes can expose you to bigger losses. Another way to manage risk is to place a stop loss order. But many intraday traders fail to understand the concept of stop loss. The most confusing aspect of stop loss is not being able to calculate the right levels.

Therefore, in this article, we will guide you to calculate your effective stop loss for intraday trading. Let us discuss in a step-by-step manner beginning with the basics.

What is Stop Loss?

When it comes to day trading, there is a huge risk involved. Since the intraday trader has to square off the position on the same day, there is very little time for reversal if the trend goes in the opposite direction which can lead to huge losses. It is the stop loss that helps an intraday trader to exit from such a wrong trade with a small loss. As the name suggests, stop loss helps you to stop out from the loss-making trade as early as possible.

Stop loss is a type of order that can be used to avoid further losses. It is not a compulsion to use stop-loss orders, but it can help minimize the risk of higher losses if the trend goes in the other direction of your trade.

Understanding How it Works

Let us look at how the stop loss works with the help of an example. Suppose, you place an intraday bet to buy 50 shares of Company ABC at 10:00 AM at Rs. 120 per share. You will make a profit if the stock price picks upside momentum above Rs. 120. But if the stock price falls below Rs. 120, you will make a loss.

Your analysis suggests that the stock price might go a few points below Rs. 120 but if it goes below Rs. 112, it will pick up momentum on the downside and the price can fall further. So, to cap your loss in case of the downfall, you can place a stop loss at Rs. 112. Now you know that if the trade does not work out in your favor, your maximum loss will be Rs. 8 per share and the total loss from the trade will be Rs. 400.

So How Do I Calculate My Stop Loss?

Calculating the right stop loss level is the biggest struggle amongst novice traders. The stop loss has to be at an appropriate level that fits the pocket size of the trader. Keeping wider stop loss can result in capital drawdown whereas the regular price swings can make you exit the trade if your stop loss is narrow.

So what is the correct level to put a stop loss order? Well, you can use either of the following three effective methods that traders use –

  • Percentage Method
  • Moving Average Method
  • Support/Resistance Method

What is the Percentage Method?

It is the most commonly used technique to calculate stop loss for intraday trading. As per this method, the stop loss is calculated based on the percentage of the stock price. For example, suppose you short a stock with the price of Rs. 500. You can set a fixed percentage, say 10%, as your stop loss. In this case, since the stock price is Rs 500, your stop loss will be Rs. 550, that is, 10% above the price at which you shorted the stock. If the trade does not go in your favor, your maximum loss will be Rs. 50 (Rs. 500 x 10%).

What is the Moving Average Method?

This is one of the easiest methods for computing stop loss for intraday trading. In this approach, an indicator called ‘moving average’ is first applied on the charts. It will display a line of average that moves along with the price. Once the moving average line is plotted on the chart, you can use it to ascertain your logical stop loss with ease.

Here’s how. If you are in a long trade, your stop loss can be below the moving average line. As in the case of a short trade, your stop loss can be below the moving average line. It is recommended to keep a little buffer in price to make room for volatility. Moving averages are available with different lengths. The longer the length of the moving average, the higher the effectiveness is.

What is the Support/Resistance Method?

To follow this method of stop loss, you need to be familiar with the support and resistance zones on the charts. Support level, in simple terms, means the level at which the falling prices take a halt. This is because buyers absorb all the selling pressure and do not let the price fall below that level. Since, at the support level, there is demand for the stock, it is also known as the demand zone. The exact opposite of that is the resistance zone. When the price goes up and falls again from the same level, it implies that the sellers are actively selling at that level and stock resists going above that price level. Since there is a supply of stocks at that level, it is also known as a supply zone.

After you ascertain the support level, you can place your stop loss for long trade below the support level. In case of a short trade, you can place your stop loss order above the resistance zone.

The Bottom Line

Most intraday traders fail due to overexposure to losses. To be consistently profitable in the stock market, you must keep a strict stop loss for every trade you enter into. This will not only help you manage loss in the wrong trades but also protect your capital in the long run.

To make the most out of your trading, you must check out the real-time trading system provided by TradeSmart which is backed by the latest technology. TradeSmart also provides you the lowest intraday trading brokerage of 0.007% or Rs. 15 per order based on the plan you select. Explore more about the available plans on the TradeSmart website.

Best Time Frame For Intraday Trading

Intraday trading is a completely different ballgame compared with long-term trading or investing activities. The main ingredient in intraday trading is technical analysis and therefore, choosing the right time frame becomes an important decision point. The technical charts are available in different types such as Candlestick, Renko, Heikin Ashi, etc. and various indicators are also used on these charts to generate trades.

Typically since the stock markets are open for about 6 hours, intraday traders have to be very quick with their trades. Quick in and quick out is the approach most intraday traders follow. Their profit target is also very small. As the intraday trade initiates and concludes in the same trading session, the risk of price reversal is high. Therefore, to avoid getting trapped out of the trades, intraday traders need to trade in a selected time frame for optimum benefit.

Before we learn the best time frame for intraday trading, let us look at some of the basics.

What is Intraday Trading?

Intraday trading includes buying and selling the stock, a future, or an option in the same trading session. Since the buying and selling are to be done in one day, there are certain rules that traders follow for intraday trading such as lower risk-reward ratio, trailing stop-loss, etc. This type of trading is all about quick momentum-based buying and selling. Since the intraday traders do not hold their positions from the start of the session till the end of the day, they prefer using smaller time frame charts to find trades.

What is the best time frame to trade intraday?

A typical stock market trading session starts at 9:15 AM and ends at 3:30 PM. The price momentum is not the same throughout the trading session. In the beginning, the price is very volatile as many buyers and sellers try to place their bets at the same time. Later as the market stabilizes, the trend of the day starts to form. After a certain point, the prices hardly move and it kind of becomes sideways. Later, again at the closing hours, the price picks momentum since traders and investors start to place their orders or square off their positions.

Keeping all those price fluctuations that take place throughout the day, traders have concluded that the best time to trade intraday is between 9:30 AM and 10:30 AM. The reason this time frame is most suitable for intraday bets is that the day’s trend usually forms during this hour and there is no major price volatility at this hour except for days when a major event is lined up such as elections or RBI’s monetary policy meet up, etc. On such event days, the market is volatile throughout the day.

But ideally, 9:30 AM to 10:30 AM has been proven the best time for intraday traders. However, many traders do not understand the importance of trading after 9:30 AM and end up impulsive jumping in right after the market opens at 9:15 AM. But it is specifically suggested to intraday traders to not enter into trades between 9:15 AM and 9:30 AM.

Here’s why.

Why should you not trade in the first 15 minutes?

When the stock market opens at 9:15 AM, the prices are very volatile since many buyers and sellers are active during that time to place trades based on the previous day’s news. The first fifteen minutes of trading is all about emotion-based buying and selling since the news based on which the decisions are taken is old. Most people just react to the news and their sentiments and interpretation about the news might not be correct.

You must have witnessed that many times the prices move to extreme levels during the first fifteen minutes and then reverses from there. Well, this happens because the long-term traders and investors take the advantage of extreme price movements to enter into fresh positions. Since they have huge quantities, the price goes in their direction and many impulsive intraday traders end up making a loss.

The actual day’s trend is established after the emotion-based trading settles down and therefore, you must always wait and watch up to 9:30 AM before placing the trade. 

Benefits of trading at the optimum time frame

There are certain added advantages of trading during the 9:30 AM to 10:30 AM time frame. Let us list them out for you.

  • The first hour typically provides good momentum for intraday trading. This gives ample opportunities for traders to make profitable trades.
  • As we discussed, intraday trades are entered into and squared off on the same day. This demands liquidity and this hour has high liquidity in most of the stocks as volume is on the rise.
  • The prices tend to go sideways after 10:30 – 11 AM since the buyers and sellers are not active after that. If you enter into a trading post that hour, you might get stuck for a long time waiting for your desired price level.

The Bottom Line

It is important to note that trading during the most optimum hour is like using a double-edged sword. It provides you with an opportunity to make the most out of momentum. But at the same time, when it’s done incorrectly, you might end up making a huge loss. Therefore, you must always keep a stop-loss intact and never take the risk over your pocket size.

To add another advantage to your intraday trading, you can explore the lowest brokerage plan offered by TradeSmart. Based on the volume of your trades, you can choose between the two plans to make the most out of your intraday trading.

 

What is Intraday Margin?

You must have realized that the amount of capital required to trade the same number of shares intraday is lesser than the capital required for placing delivery trade orders. If not, let us tell you an interesting fact. Suppose you need Rs. 1,000 to buy certain shares for delivery, then to trade the same number of shares in intraday, you will need, say, only Rs. 250. Well, this is because of the concept called margin. Margin allows you to buy shares over and above the capacity of your capital. Sounds interesting, right? However, it comes with its cons.

Let us go ahead and know about intraday margin, the impacts of margin trading, certain rules and regulations about margin, and the pros and cons of margin trading.

What is Intraday Margin?

Day trading, aka intraday trading, is a type of investing where you buy and sell the shares on the same day. In this type of trading, the broker provides you with a certain margin to purchase more shares than you can buy using your capital. It is like funds borrowed from the broker to trade. The facility is provided by most brokers in India.

The margin borrowed to buy and sell more shares allows you, as an intraday trader, to take advantage of the rising prices. But at the same time, if the trade does not go in your favour, the losses are magnified since you lose money for the larger quantity of shares. To make the most out of this facility, you must take leverage only in certain trades that have a higher probability of success.

In simple terms, margin increases the power of your capital to buy a larger number of shares. It sure has an impact on the profitability of your trades. Here’s how it works.

Effects of Margin

To understand the impact of margin on the outcome of your trades, let us take an example.

Suppose you bought 200 shares at Rs. 100 each. Ideally, in normal trade, you would need a capital of Rs. 20,000 to buy the shares. But for the intraday trade, you would require only Rs. 4,000, assuming a margin of 5x. The 5x margin gives you 5 times leverage, meaning, you can buy the shares worth 5 times your capital.

Now let us say that you set a target of Rs. 104 and a stop loss of Rs. 98 for the trade. So, if the trade goes right, you earn Rs. 4, which is 4% of the share price. And if the trade fails, you lose Rs. 2 which is 2% of the share value. But since you have paid only 1/5th of the value by using a 5x margin, your ROI will change.

Your chance of profit, in absolute value, is Rs. 800 (Rs. 4 x 200 shares) on the risk of Rs. 400 (Rs. 2 x 200 shares). Since the capital used was Rs. 4,000, there can be a profit of 20% (Rs. 800 ÷ Rs. 4,000) or a loss of 10% (Rs. 400 ÷ Rs. 4,000).

Therefore, because of the margin, if the price moves up by 4%, you make 20% on your capital. And if it goes down by 2%, you lose 10% of the capital. This is how margin magnifies gains and losses. So, we can conclude that the intraday margin has a direct impact on the ROI. And as it works both ways, with the chances of earning increased profits, the risk also magnifies.

Role of SEBI

Securities and Exchange Board of India (SEBI) is the regulating authority for everything related to the stock market. According to SEBI’s guidelines, those who trade with margin should maintain a minimum of 50% of total investment as the initial margin and additionally 40% of the current value as their maintenance margin.

From 2020, SEBI also made it mandatory to maintain the cash balance in the trading account as a margin requirement. Earlier, the margin requirement was only calculated at the end of the day. However, since new regulations were implemented, it is still required that traders meet their margin requirements at the start of each new transaction.

The maintenance margin will be fixed by the stock exchanges based on the volatility in the stock market. These measures are taken by SEBI in the interest of retail traders who could lose money if markets become very volatile. 

Advantages of Intraday Margin

Here are some of the benefits of intraday trading by using margin.

  • If you have insufficient capital and find a trading opportunity, then you can benefit from a margin facility to capitalize on the opportunity.
  • You can avail a facility to utilize your shareholding in the DEMAT account as collateral for the margin if your broker allows the same.
  • As we discussed in the example, your ROI will improve when you use the margin facility.
  • It increases the purchasing power of your capital by allowing you to purchase more shares with the same capital.

Let us also look at the other side of the coin.

Disadvantages of Intraday Margin

  • Along with higher profits, it also magnifies the losses. In a single trade, you could lose a big chunk of your capital if the trade goes wrong.
  • The minimum balance requirement has to be fulfilled at all times. If you fail to do so, your broker might exit your trade. You could lose an opportunity for a good trade.
  • Over leveraging has been a very popular reason for major losses in the stock market. Many novice traders lose their entire capital while trading with a large margin.

That said, you must follow good practices to make the most of margin trading. You can use the facility wisely only when you’re confident. You can utilize lesser margin capacity instead of using full leverage.

In a nutshell

Intraday trading using margin is a risky business if done haphazardly. However, if done in the right way, an intraday trader can make the most out of this facility. Following a trade setup in a disciplined manner and maintaining a strict stop loss in all trades has proven beneficial to many novice traders who succeed in this business. But along with that, you must also choose the right broker with an effective trading terminal.

TradeSmart provides a robust trading terminal and facilitates a seamless intraday trading experience at the lowest brokerage in the country. You can select the plan as per your requirements. TradeSmart also provides up to 5x margin on intraday equity trading. You can check the margin here.

How to do Nifty Intraday Option Trading?

Conventionally, trading and investing were only done in stocks. But slowly, as the market participants increased and the demand for different instruments rose, the exchanges started offering derivatives segments for indices like Nifty and Bank Nifty. The options contracts were started by the exchange with an intention to facilitate hedging but the traders mostly use index options to initiate speculative positions in the market.

Index trading in Nifty and Bank Nifty is a very common practice amongst traders in India. It is done through derivative instruments like futures and options. In this blog, let us discuss intraday options trading in the Nifty index.

What is Nifty?

The Nifty is a combination of the words National Stock Exchange and Fifty. It is a list of the top 50 stocks that are actively trading on the NSE. The Nifty50 is one of the two major stock market indices in India. The flagship index is maintained by the National Stock Exchange. It comprises stocks from various sectors and indicates the overall health of the economy and the general sentiments of the market participants.

What are different ways to trade in Nifty?

As we discussed, Nifty is an index in which you can trade and invest using various instruments such as Options, Futures, Exchange Traded Funds, etc.

  • Nifty Options

These are one of the derivative contracts using which you can make intraday or swing positions. Intraday trading is where you buy and sell on the same day whereas swing trading is where you hold the position for a few days or weeks. Nifty options are used for trading and not investing.

  • Nifty Futures

A futures contract is an instrument using which a trader can enter into an agreement with another person to buy or sell at a future date at the price prevailing at such date. If the price has increased over the duration of the contract, you can sell it and get a profit. Like Nifty Options, Nifty Futures are also used for trading purposes.

  • Exchange Traded Funds (ETFs)

ETFs are baskets of stocks that are covered under the underlying index. For example, in the Nifty ETF, all the fifty stocks in the index shall be covered. When you buy one unit of an ETF, a fraction of the sum is invested in all fifty shares. When the index goes up, the value of the ETF goes up and vice versa. Nifty ETFs are used by investors for long-term investing in the index.

What is Options Trading?

Options trading involves buying and selling options contracts for profit. Options are derivatives contracts that derive their value from the underlying asset. Nifty Options derive their value from the index Nifty50. There are two types of options – call and put. When your view is bullish on the index, you buy Nifty Call Option and when your view is bearish, you buy Nifty Put Option. Options trading is considered risky compared to other forms of instruments but with hedging and stop-loss order in place, you can make the most out of it.

Some Important Jargons to Know

Before you embark on the journey of learning how to do intraday trading in options, you must know the following jargon related to options trading.

  • Spot Price: The value of the index “Nifty50” is called the spot value. The premium of Nifty options is based on this spot price. When you see Nifty at 17900, that is its spot price.
  • Option Premium: The price at which transaction of buying and selling takes place between the buyer and seller is called options premium. Its value depends on the spot price. For instance, if you buy a Nifty 18000 call option for Rs. 85, then Rs. 85 you pay is the premium.
  • Strike Price: It is the price at which the call or put option can be exercised on the date of expiry. In the above example, 18000 is the strike price of that Nifty call option.
  • In The Money (ITM) Option: If the strike price of the call option is lower than the spot price, it is called in the money call option. And if the strike price of the put option is higher than the spot price, it is called In The Money put option.
  • Out of The Money (OTM) Option: If the strike price of the call option is higher than the spot price, it is called out of the money call option, whereas in the case of a put option, if the strike price is lower than the spot price, it is called out of the money put option.
  • At The Money (ATM) Option: The call and put options with strike price equivalent to the spot price are called at the money options.
  • Expiry: The date on which the options contract expires is called expiry. There are weekly and monthly expiry options available for trading in Nifty.
  • Time Decay: As the expiry date comes closer, the option premium loses its value. This loss of value of the premium is called time decay.

How to trade Nifty Options intraday?

As you are aware that there are two types of options, call and put. Both of these options can either be bought or sold. So this leads us to four positions you can make in options intraday trades. Those are:

  • Buying a Call Option
  • Selling a Call Option
  • Buying a Put Option
  • Selling a Put Option

Let us look at each scenario to know how you can trade in Nifty.

  • Buying a Call Option

To initiate a bullish position in Nifty, you can buy a call option. When the spot price of Nifty goes up, the premium of the call option increases and you can benefit from it. If the Nifty spot value goes down, the loss will be limited to the premium paid and if the Nifty spot goes up, the profit can be unlimited.

  • Selling a Call Option

You can sell a call option if your view is bearish. The maximum profit is limited to the premium collected at the time of selling the call option but the potential for loss in this trade is unlimited if the Nifty spot goes up. Normally, option selling is done with an intention to make the most out of time decay.

  • Buying a Put Option

You can benefit from buying a Nifty put options intraday if the Nifty spot value falls. The profit potential of this trade can be unlimited whereas the loss can only be limited to the extent of the premium paid. However, if the Nifty index value does not fall, there can be a disadvantage of time decay.

  • Selling a Put Option

Selling a put option gives limited profit but it holds a risk of unlimited loss. You can benefit from time decay by selling a put option if the Nifty spot goes up or at least it does not fall any further. A seller of put options has a bullish view.

So if you have a bullish view, you can either buy a call option or sell a put option. On the contrary, if you have a bearish view, you can either buy a put option or sell a call option. You must also note that buying options comes with a natural disadvantage of time decay if the price does not move in your predicted direction immediately, whereas, selling options naturally has an advantage of time decay as premium erodes with expiry coming closer.

The Bottom Line

Buying options contracts come out as an attractive intraday trading strategy to many traders due to its ability to make unlimited profits with limited loss. But at the same time, it is important to be aware of the time decay that adversely affects options premium. If the expected move does not initiate quickly, option value starts to decay and traders start losing money. As far as option selling is concerned, you must be aware that it involves unlimited loss against limited profit. You must always hedge your position while trading in options. You can make use of many strategies that are available for options trading.

Apart from that, many traders take multiple trades during the day and end up paying high brokerage. TradeSmart provides you a robust platform for intraday Nifty options trading at the lowest brokerage of Rs. 15 per executed order. You can check the price and other features by visiting the TradeSmart website.

Intraday Trading Indicators

There are multiple technical indicators available in the stock market. Some are based on extensive research, while others are just simple averages of prices. Many traders and investors use the technical indicators to time their entry and exit in the stock market. It helps them as a tool in their trading regime.

Before we know which are the most suitable indicators for intraday trading, let us know the types of indicators in the stock market and why they are used in the first place.

Types of Technical Indicators

Based on the timing of information, technical indicators can be divided into two types, viz. (i) Leading indicators, and (ii) Lagging indicators. Let us briefly know about the two below.

  • Leading Indicators

A leading indicator is a type of indicator that aims to provide information before a price move is made. It is a gauge that shows when a price is about to go up or down. These indicators can only be used for guidance and not rely on them blindly.

  • Lagging Indicators

The majority of the indicators give lagging information. It tells you about the reversal after the price has reversed. They can be triggered by historical data or price divergence. Divergence occurs when the price moves above a previous high but the indicator does not.

Why do we need Indicators for Intraday Trading?

Indicators are the overlays that provide vital information about the chart and price movements. The indicators indicate how the price could behave shortly. This is difficult to predict unless various data points are merged to form valuable information. Indicators merge important data points to deliver reliable information which is easy to understand. Following are some factors included in technical indicators.

  • Momentum

Momentum indicators are used for determining the strength of a trend and whether there is a possibility of reversal.

  • Volume

On-Balance Volume is a measure of how many stocks are being sold and bought over time. It shows how strong the move is when the price changes.

  • Trend

The trend indicators are often used to evaluate the direction of the market. They can also be used to identify potential trends.

  • Volatility

A high volatility index shows how much the price is moving in the given period. A low volatility index shows how much the price is moving.

Technical Indicators for Intraday Trading

When it comes to digging into the technical analysis of charts, you will discover hundreds of indicators that you can apply to the charts to gauge future price movements. Some are leading indicators while 

  • Moving Averages

The moving average is a commonly used indicator for determining the direction of the market. It provides traders with important information about the current trends and the stop-loss levels. There are two types of moving averages – simple moving average (SMA) and exponential moving average (EMA).

  • Simple Moving Average:

A simple moving average is used to determine the average price of a selected range of prices. It simply adds the price of the share for a given number of periods and then divides the total with the number of periods to get a simple average price. SMA is little less sensitive to the share price movement.


  • Exponential Moving Average:

The EMA does the same job as SMA, however, the simple moving average simply calculates average data whereas, the exponential moving average gives more weightage to the recent price movement. Due to this unique way of computation, the EMA is more sensitive to the price movements compared to the SMA.

 

The image provided below demonstrates both SMA and EMA. The red line represents SMA whereas the blue line represents EMA. You can understand how the EMA responds quickly to the price movements and reacts more sensitively compared to the SMA.

Intraday Trading Indicators

(Source: Fidelity.com)

The moving averages can be of different periods such as 5, 10, 20, 50, 100 period MAs. These periods represent the number of candles. For example, a 10 SMA on a 5 minutes chart indicates a simple moving average of closing values of ten candlesticks of 5 minutes.

That way, with each candle, one point is plotted on the chart. This moves forward with the formation of each new candle. Hence the name – ‘moving average’. In totality, these points form a line on a chart that acts as support or resistance for the stock price. 

  • Relative Strength Index (RSI)

The relative strength index is a momentum indicator used to evaluate the market’s overbought and oversold status. It can be used to determine if the market is currently trending or not.

RSI is a line indicated by values ranging between 0 and 100. When the RSI reaches between 70-100, the stock is said to be in an overbought condition. On the contrary, when it reaches between the range of 0 to 30, the stock is said to be oversold.

The image below demonstrates how the share price that was oversold witnessed buying activity which took the price higher and how, when it reached the overbought zone, the buyers booked their profits by selling the shares.

Intraday Trading Indicators

(Source: Fidelity.com)

Instead of 70-30, some traders use 80-20 or 60-40 based on their needs. To know if the stock is in an uptrend or downtrend, the value of 50 is used as a midpoint. When RSI is above 50, the stock is said to be in an uptrend and when it is below 50, the stock is said to be in a downtrend.

  • Bollinger Bands

Bollinger bands are used to indicate the volatility of the market. There are three bands in this indicator. A stock’s volatility is measured in these three different bands: a middle band, an upper band, and a lower band.

Intraday Trading Indicators 2

(Source: DailyFX.com)

The mid-band is a simple 20-period moving average. If the stock price is below the Bollinger Band lower line then it has the potential to increase in the future. Conversely, if the price is over the band upper line then it can be sold. You can understand this better by referring to the illustrative image given above.

  • MACD

MACD stands for Moving Average Convergence and Divergence. Convergence is a case where two moving averages move towards each other. And divergence is when the moving averages are moving apart. These two points indicate different scenarios in the stock price. MACD is based on exponential moving averages (EMAs).

Intraday Trading Indicators

(Source: DailyFX.com)

There are two lines in this indicator – one is the MACD line and the other is the signal line. MACD line is the difference between 26 and 12 periods EMAs. The signal line is a 9 period EMA. You can refer to the image provided above to understand better.

When the signal line goes above the MACD line, it is a buy signal and when it goes below the MACD line, a sell signal is generated. It is a very easy-to-use indicator. The buy and sell signals generated by the crossovers are marked in the illustration above.

The Bottom Line

While we are all in search of a holy grail to make profitable trades, it is far more rational to be realistic and accept the fact that such trading setups do not exist. Trading is, and will always be, a game of probability, and therefore, even if these technical indicators are used, one must plan and define the risks from trades and maintain a favourable risk-reward ratio at all times.

How to Select Stocks for Intraday?

With the rise in market participants, the number of day traders are on the rise. As high as 60%-80% of the day’s volume comes from intraday trading activities. So what is it that is attracting a large number of participants to day trade more often than taking delivery of shares? Well, while it has its plus points like higher returns, lower overnight risk, and increased leverage which pulls many traders into it, day trading has some downsides too. 

But when done within a well-defined framework with the right system and calculated risk, you can make the most out of day trading. So let us get down to knowing the process of selecting intraday stocks with the very basics first.

What is Intraday Trading?

Intraday trading, commonly known as day trading, involves buying and selling stocks within a day for speculation purposes. As the name suggests, the buy or sell orders are executed intraday before the stock market closes, that is on the same day as the corresponding buy or sell order was executed. Traders take intraday trades to avoid the risk of overnight change in the market sentiments. The goal of this type of trading is to track the movements of the stock prices and make quick gains from it.

How to Select Stocks for Intraday Trading?

We all know that picking stocks for long-term investment must have huge growth potential to create wealth. But the selection of scrips for short-term purposes such as intraday trading has a completely different list of requirements to fulfill. Below mentioned are some of the characteristics a stock must-have for you to buy and sell on the same day for gains.

  • Stock must be Highly Liquid

Liquidity means the ability to easily buy and sell. Since the intraday trader has to buy and sell the stock on the same day, the stock must be highly liquid to avoid problems in finding a potential buyer or seller at the time of squaring off the day’s position. Usually, liquid stocks have a huge trading volume that enables buyers to purchase and sell without affecting the price.

For example, if you took a long trade in Stock ABC but purchased it in the morning session, then you need to square off the position by selling the stocks before the market closes at 3:30 PM. If the stock is not liquid, then the number of active traders in that stock will be lesser and you will not find any buyers at the time of selling. Therefore, you must always look for stocks with a huge number of active buyers and sellers.

To identify the liquidity in stocks, must look at traded volume and refer to the market depth and watch for bid and offer price. The total number of bid and offer orders must be high and the gap between the nearest bid and offer price must be small.

  • Stock must be Volatile but not Too Volatile

The volatility of a stock is the rate at which the price moves during a given period. For a day trader to safely buy and sell the stocks on the same day, it is important to ensure that the stock prices are volatile. At the same time, you must also make sure that the price of that stock does not fluctuate too much as it can trigger your stop-loss levels very easily. Also, the less volatile stocks are not good for intraday trading since the prices don’t move much. Price movement is the main feature that a trader looks for in the stock to gain from it.

For example, suppose you buy 100 shares of Company X in the morning for Rs. 2000 per unit. The price of share X is not very volatile and by the afternoon it only went up to Rs. 2002. You used the capital of Rs. 2 Lakhs (100 shares x Rs. 2000 per unit) for this trade and earned only Rs. 200 (100 shares x Rs. 2 per unit) which is 0.1%. Even the trading charges are higher than this percentage. Therefore, you must select stocks that are volatile but not too volatile.

  • Stock must be Correlated with the Index

If you have been following the stock market for a while, you must have noticed that when the Nifty is up, most of the stocks are up and vice versa. This is because these stocks have a good correlation with the index. If the overall market sentiments are bullish, the stock prices go up and when the overall market sentiments are bearish, the stock prices fall.

As a day trader, you must select a stock that is positively correlated with the index as overall market sentiments will be in the favour of the price movements. Along with the index, positively correlated stocks benefit from the general market sentiments. For example, when the most awaited policy is announced by the Government, the overall stock prices go up except for a very few stocks. You should be on the side of the overall market sentiments.

Apart from these characteristics that the intraday stock must possess, there are certain other factors with the help of which you can select the stock to trade. They are:

  • Technical Analysis

There are certain indicators such as Moving Averages, MACD, Bollinger Bands, RSI, etc that help traders by indicating probable price movement. You can build a system using such indicators and when an ideal trade setup is generated in a particular stock, you can select that share for intraday trading.

  • News

Certain news such as the announcement of financial results, mergers, acquisitions, expansion of company’s operations, change in economic policies, etc. can create good intraday trading opportunities. You can pick stocks based on that. But you should be aware that price fluctuations on such stocks can be very high as the volatility increases before and after the announcement of the news.

The Bottom Line

Practice makes one perfect. Once you start with the selection process and begin your intraday trading, this checklist will become your instinct over time. The first and most important step in intraday trading is to select the right stock and therefore, you must exercise this task with utmost caution. Never jump into placing orders without proper study. The right stocks can make a huge difference in your trading performance. To make the best decisions, you must first analyze and then trade.

What Is Intraday Trading? – Everything About Intraday Trading

Those who trade in the stock market often have various goals in mind while investing. These goals can be categorized into two – long term and short term goals. Long term usually involves for a period for more than 1 year and short term may range from days, weeks or even months. Both cases are capable of producing high returns and it depends on the person’s risk capacity and time given to the stock market.

Intraday Trading – What does it mean?

Intraday trading is the practice of buying and selling stocks the same day you purchase them. The advantage of doing so is with short-term profits, however, the risk is also in proportion. Suppose you buy 100 stocks at Rs. 300 and after a few hours the price of the stock goes to Rs. 310. Taking advantage of this, you decide to sell those 100 stocks on the same day and earn a profit of Rs. 1,000. This is called intraday trading

For quite a long time, trading in the stock market was considered cumbersome and only a few companies and talented brokers/professionals risked their money in the same. However, as technology progressed, phone trading and online stock trading have made it easier for the common man to enter the field of stock trading.

As of the present, you can trade stocks at the click of a button. This also makes it easier to indulge in intraday trading. So let’s understand intraday trading in more detail.

The Basics of Intraday trading

The basics of intraday trading are as follows:

  1. You may mention that you are indulging in intraday trading to the stockbroker. In case you plan to use an online portal, you would like to activate the option or open an intraday trading with a broker like TradeSmart for intraday trading. Doing so makes sure that you are unable to carry the stock to the next day.
  2. You don’t own the stock in case of intraday trading as such. Basically, you simply invested in the value of the stock and would bear the profit or loss for the transaction.
  3. You cannot carry the stock till the next day. Once you buy the stock, you need to sell it by the end of the day. If you don’t sell it yourself, the stock will get squared off by your broker.
  4. Intraday trading involves a much smaller risk than long-term investment in stocks. 

What should you consider before indulging in intraday trading?

Intraday trading isn’t for everyone. While intraday trading isn’t a gamble for reasons which we will see later, it still carries significant risks. Consider the following before indulging in Intraday trading:

  • Discipline: Before you even think about entering Intraday trading, ask yourself whether you get carried by emotions or not. If yes, then don’t even think of opening the Intraday trading portal on your system. Invest in Intraday trading only if you are aware of financial management and will surely keep aside a part of the profit before reinvesting.
  • Use of data analytics tools: Unlike a long-term investment in stocks, there was no way of predicting the Intraday value of stocks by simply looking at the charts. However, now, data analytics make it easier for people to predict Intraday trading. It still isn’t precise but could be very helpful.
  • The right strategy: Everything else apart, the right strategy is important for Intraday trading. 
  • Significant capital: Risk-taking isn’t for anyone and definitely not for those who don’t have savings. It would be a bad idea to indulge in such a high-risk investment if you don’t have backup capital like fixed deposits, some money in your account, etc.

Pros of Intraday trading

The advantages of Intraday trading are as follows:

  1. The profit could be quite high if your prediction goes right.
  2. You can save on delivery charges.

Cons of Intraday trading are as follows:

  1. The risk is still very high and if you aren’t disciplined with your approach, you could lose huge sums of money.
  2. You don’t really own the stock. You are simply trading in the value of the stock.
  3. Even if you don’t want to sell the stock, it will get sold at the closing price for the day.

Intraday Trading indicators

With so many events happening simultaneously in the stock market, it can often become hard to keep track of what is happening. Hence there are indicators created to look out for that help in better analysis of the stock and bolster the decision of investing. Some indicators for intraday trading are

  1. Moving Averages – Also known as daily moving average (DMA) it is a line on the charts that shows the behaviour of the stock overtime.The moving average lets you understand the movement of the price as the behaviour of the price is not in one direction
  2. Bollinger Bands – It comprises three lines, the moving average, the upper limit and lower limit. With these you can observe the movement of the price within these ranges and decide accordingly.
  3. Momentum Oscillators – Since the prices are determined by the market fluctuations, this makes the prices very volatile. To determine whether the price may rise or fall, a momentum oscillator is used.
  4. Relative Strength Index (RSI) – This indexes all the trading that happens over a period of time. It ranges from 1-100 and shows when a stock was bought or sold at its highest. 

Intraday trading and delivery trading

Unlike intraday trading where you have to buy stock and sell it the same day, delivery trading is when you buy stock but do not sell it on the same day. Instead, you keep it in your demat for days, months or even years before you sell the shares. Thus you keep the shares for over a period of time and investors consider the price movement of stock for long-term to book profits rather than price fluctuations within the day.

Tips to do well in intraday trading

While there is no sure shot method of predicting the results in intraday trading, below are a few pointers to keep in mind before you start day trading

  1. Don’t panic – Prices keep fluctuating throughout the day so don’t rush into buying or selling when you see a change if you want to achieve your goal. Keeping a cool mind and controlling emotions goes a long way in getting the desired results and you should already be prepared in knowing how much to risk and not to risk.
  2. Be updated – You need to be constantly updated with the latest events that are happening in and around the country and with the particular company or industry you wish to invest in. This will help in determining the rise or fall in stock prices and can trade accordingly.
  3. Use stop loss – Stop loss is a tool where you can limit the price of the stock and buy or sell it once it reaches a certain price.
  4. Don’t have high expectations – Keep your expectations minimal and reasonable and don’t expect to make huge profits with minimal transactions. Rather it’s better if you can make modest profits from multiple transactions.

Conclusion

Intraday trading is a feature that a lot of traders use to make quick profits and is important to choose the right broker that offers the best features as per your convenience to conduct trading in a smooth and efficient manner. TradeSmart is one such broker which offers multiple facilities and also a free demat account so that you can venture into the world of trading with less cost and maximize profits.

Tax on Intraday Trading – How Gains are Taxed?

Wherever gains are involved taxes cannot be ignored. One needs to understand the taxation of income very clearly. Gains from the sale of assets unlike other sources of income like salary, interest income rentals etc., are a little different and needs to be clearly understood. Gains from the sale of assets are taxed in two ways- long-term capital gains or short-term capital gains depending on the holding period. While there is little or no confusion on the long-term capital sale of assets, there is a lot of it in the short-term sale of assets. This is because taxation of short-term capital gains is based on delivery and non-delivery otherwise known as intraday. 

Delivery and intraday

The delivery-based gains where there is a movement of stocks out of your demat within less than 12 months is taxed as short-term capital gains. However, if an asset is bought and sold on the same day without taking delivery is known as intraday and is speculative. It is charged to tax as business income and treated as a speculative business. 

The point to be noted here is we are discussing assets like stocks, mutual funds and not derivative products like futures and options that are taxed as a non-speculative business.

Speculative business

Intraday trading is done primarily to take advantage of the price fluctuations without taking actual delivery of the shares. Hence, gains or profits are treated as speculative and charged under the head profits and gains from business or profession as a speculative business. It needs to be noted that trading in futures and options even if it is intraday, is not a speculative business. Trading in futures and options is a non-speculative business.

Tax on speculative business

Income from speculative business and non-speculative business both are aggregated with other non-business incomes like salary, rentals, income from other sources like interest etc., and taxed at the applicable slab rate.

However, being a business one can claim expenses against the income related to both speculative and non-speculative business.

Let’s understand this with an example

An individual discloses the following sources of income:

  1. Salary income of INR 15,00,000
  2. Rentals from property INR 50,000
  3. Income from speculative business INR 75,000 (after taking expenses)
  4. Income from trading in futures and options INR 25,000 (after taking expenses)
  5. Long term capital gains of INR 2,50,000
  6. Short term capital gains of INR 50,000

Let us calculate his income tax liability

Income from Salary INR  15,00,000

Property Rentals INR  50,000

Income speculative business INR  75,000

Income from Non-speculative business INR  25,000

Total INR  20,00,000

Tax On INR 20,00,000 based on the tax slab INR  4,12,500

Income tax slabs for Individuals aged below 60 years & HUF 

Income slab Rate   Tax
0 250000 0 250000 0
250000 500000 5% 250000 12500
500000 1000000 20% 500000 100000
1000000 2000000 30% 1000000 300000
      2000000 412500

Long term INR  15,000Tax on Capital gains

(10% over and above INR 1 lakh (INR 2,50,000-INR 1,00,000)

Short term (15% of INR 50,000) INR  7,500

Total taxes (INR 4,12500+INR 15000+INR 7500) INR  4,35,000

Loss on speculative and non-speculative business

Income includes negative income as well. Hence any loss occurring on any business can be set off against incomes and the unabsorbed losses can be carried forward to be set off against future incomes. There are rules prescribed for set-off and carry forward of losses by the income-tax. They are as below

    • Loss from speculative business can be set-off against only gains from any speculative business during the same year
    • Loss from speculative business can be carried forward for set-off for 4 consecutive years.
    • In the above example let us assume that the individual has made a loss of Rs75,000 in speculative business instead of a profit. In this case, the loss cannot be set off against any other income except speculative income. Therefore, INR 75,000 can be carried forward to be set off against future speculative income for 4 consecutive years.
    • Loss from non-speculative business can be set off against any income including speculative business income except salary during the same year.
    • Loss from non-speculative business can be carried forward to be set off for 8 consecutive years.
    • In the above example let us assume that the individual has made a loss of INR 2,50,0,00 from a non-speculative business instead of a profit. In this case loss of INR 2,50,000 will be set off against the profit of INR 75,000 and INR 25,000 from speculative business rental incomes respectively. The balance of Rs1,50,000 will be carried forward for set-off for a maximum of 8 years.

 

How to Calculate Turnover for Futures and Options (F&O) Trading?

Income from stock markets is perhaps the most confusing topic concerning taxation. This is because it touches upon two different tax heads namely; Income Capital Gains (long-term or short-term) and Income from Businesses or Profession.

There are two ways income from trading is treated  under the income tax act

  • Speculative business- Intraday trading is treated as speculative
  • Non-speculative business- Trading in futures & options is treated as non-speculative business income

Business of F&O trading

Any business comes with a lot of obligations. Maintenance of books of accounts and getting them audited, advance tax payments and filing returns on time are but a few of them. Let us examine some relevant rules laid down by the income tax act concerning business.

  • Maintenance of books of account- Any business entity has to maintain books of account. However, in the case of stock market trading, the stockbroker maintains the ledger and contract notes and bills. Therefore, it is less cumbersome for the F &O trader to maintain them.
  • Audit- Like any other business F&O trading also attracts audits. Audit applies to a business if its turnover exceeds Rs 5 crore. This limit has been increased to Rs.10 crore from FY 20021-22
  • Filing of returns- Any taxpayer is obliged to pay tax on the due date prescribed by the income-tax act. Failure to file returns attract penalties.Non-audit taxpayers are supposed to file their returns by 31st July, while those taxpayers who are subject to audit have to file by 30th September.
  • Payment of advance taxes- Every person whose estimated tax liability is more than Rs.10,000 is liable to pay advance tax on the dates mentioned on the estimated income. Not paying would attract interest for the delayed period.

There are some advantages as well

  • Claiming of expenses and exemptions- expenses directly attributable to the business can be claimed. There are some exemptions as well allowed by the income tax act.
  • Carry forward of losses- losses can be carried forward to be set off against future incomes provided the return is filed on time. 

Turnover for audit applicability for F&O trading

Trading in F&O is slightly different to other businesses. Other businesses are pretty straightforward in arriving at their turnover and profits, however, in F&O trading turnover and profits have to be computed.

Computation of turnover for F&O trading involves aggregation and arriving at the absolute value of the following

  1. The sum of favourable outcomes (Profits)
  2. The sum of the absolute value of unfavourable outcomes (absolute value of losses)
  3. Premium received on selling options
  4. The difference on any reverse trade 

The aggregate of the above will be the turnover from F&O trading.

Table 1

Particulars Amount Absolute value
Profit on options transactions 55000 55000
Loss on Futures Transactions -50000 50000
Premium received on the selling of options 25000 25000
Loss on reversal of the sold options -10000 10000
Turnover   140000

Tax audit

Section 44AB read along with section 44AD of the income tax act says an account need to be audited u/s 44AB under the following circumstances

  • if gross receipts/turnover exceeds the threshold limit of Rs.5 Crin a financial year
  • if he claims that his actual net profit is less than 6% of the turnover as calculated in table 1 above and 
  • the taxable income should be above the threshold level of Rs.2,50,000.

The table below contains the income details of a trader. Let us understand the concept of a tax audit.

Particulars Amount
Income from salaries 10,00,000
Rental Income 40,000
Income from interest 20,000
Loss on F&O business -75,000
F&O turnover  1,75,000
6% of F&O turnover 10,500
F&O loss to be carried forward  -15,000

The trader declares an F&O trading loss of Rs.15,000 and wantsto file his return without a tax audit report. However, in this case, he will not be able to as the conditions mentioned in Section 44AB is not met. His actual net profit (in this case loss) of Rs.15,000 is less than Rs.10,500 which is 6% of the F&O turnover and due to his salary and other income his threshold level of taxation is more than Rs.2,50,000.He will have to get his accounts audited under section 44AB. The only alternative is he has to pay tax on Rs.10,500 and file the return without a tax audit report.

Taking the same example if the trader has no other income apart from F&O business, the question of tax audit nor tax. 

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