The word ‘intraday’, a trading term is a coined word, that means, ‘within the day’. Intraday trading chiefly takes place in the time span from opening of the market to its closure, which on an average is about 6 hours, or so, depending upon the market. Some markets which are all-open markets such as the currency or Forex market, consider a time span of 24 hours or in some cases, 12 hours as an intraday trade time frame. Such a 12 or 24 hour time frame needs to be considered or assumed being that these markets are open round the clock and are usually shut only on weekends. Officially, the market time extends from 20:15 GMT on Sunday to 22:00 GMT Friday. The 24 hours are counted from 20:15 GMT. Hence, for all-open markets, while trading, you need to bear in mind the opening and closing times of the market in context with the GMT and not your home/local time. In certain cases, the term ‘intraday’ is also used as a synonym to ‘within a day’. For example, ‘the cost of ‘XXX’ stock hit an all time high of $500 in an intraday’.
What is Intraday Trading?
Intraday trading is usually defined to be a purchase and sale of securities or commodities or objects of trade within one day, that is between the opening and closing of the market. This term is more of applicable for stock markets owing to the fact that almost all the stock markets across the world, some of them even having an international standing, tend to have an opening and closing time (which has a time frame of about 6-8 working hours). You will certainly find that other markets such as currency or Forex and commodity markets have investors following such a form of trading. The following are some of the common characteristics of an intraday trade:
- Within a single trading day, there are certain ups and downs in the prices of stocks and securities. The investor who undertakes such a trade, aims at using these ups and downs to his benefit.
- The common intraday trading strategy which is followed is, purchase at a low price and sell at a higher price. Within this framework several other sub-strategies are used.
- The percentage profit per unit (one share or one security) is usually very low. In some cases it is as low as barely 3-4% or in extreme cases 1-2%.
- The actual profit in such cases lies in the arbitrage trade, that is the investor makes an attempt to buy and sell units very, very quickly, almost simultaneously, with an intention of buying the maximum units at a lower price and selling them at the highest possible price.
Process and Execution of Intraday Trades
A standard intraday trade usually begins with a purchase, which in the professorial language of investors is known as obtaining a ‘position’. The investors buy at a lower price and sells at a higher. It must be noted that people who are engaged in regular intraday trade often tend to focus on short term goals and hence, take price of the stock as their focal point of decision. Most of them barely even known the name and details of the securities which they are purchasing, all they need is a stock that has low price and which is expected to go up.
After the position is obtained, the investor waits till the market price goes up sufficiently, then immediately sells the securities. In some cases, he also conducts an arbitrage, that is, the investment is done rapidly and almost simultaneously. Here the percent profit is quite low.
Risks and Problems Involved
There are three principal risks and problems which are associated with intraday trading, they can be explained as follows:
- There is an inevitable and almost permanent risk that the position or the purchased stock may come down, causing an immediate loss. Apart from that, there is also a possibility that the position may remain constant or rise very little, which is not very fruitful, resulting into very low percent profit.
- The second drawback is that the brokers through whom the trade is executed, charges commission, which is not at all welcome, as it eats up some of the investor’s profit.
- The third drawback is that in case of an intraday, we can guess or have a really good hunch, however in case of these trades, the speed of the transactions is so fast that there is almost no time left to do a proper forecasting or logical reasoning. Logic and forecast reasoning is applied to a minimal extent.
Speed, alertness, fast calculations and excellent mental reflexes is the key to nail an excellent profit while doing intraday trades. There are several other strategies which can be implemented.