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The advent of online trading, available to anyone with a smartphone or tablet, has opened financial markets like never before. Modern technology, 24-hour news, and minimum commissions have levelled the field for anyone wanting to trade. Intraday trading, or day trading, has grown hugely over the past several years on the back of this technological shift.
This style of trading is one of the most popular ways to buy and sell CFDs on currencies, stocks, and other financial assets. By trading during the day, traders hope to capitalise on opportunities for sharp price movements. Various strategies can be used to take advantage of market mispricing, with positions always closed out at the end of the trading day.
What is intraday trading?
Intraday trading involves the buying and selling of financial instruments within a single trading day. This means a trader will never hold an open position overnight. They will close out their positions at the close of each day and start over the following day.
The purpose is not to invest over the long term. But instead, it is to trade in and out of positions, sometimes at high frequency, for quick gains. Changes in markets are tracked closely to analyse price action. Small market movements help guide traders’ decision-making.
One of the key prerequisites for successful intraday trading is implementing a prudent risk management plan, which helps reduce losses and prevent them from getting out of control. Strategies such as stop-loss and take-profit orders would enable traders to determine the price they are willing to pay and the price at which they are willing to sell. On the contrary, without a risk management mindset, traders may be more prone to letting emotions influence their decision-making, which is often disastrous in intraday trading.
How does intraday trading work?
Intraday trading often involves executing a large number of trades in a short space of time. There may be a relatively small profit (or loss) for each trade. This will potentially build up throughout the day, depending on the frequency of buying and selling and the strategy involved.
It is important to remember that intraday trades require traders to square off open positions at the end of the day. If the trader is using margin, the trader’s long or short position must be offset by the corresponding opposite trade. This means the trader’s book is then “flat” with no open positions and no overnight risk.
For CFDs on stock trading, this implies there is no transfer of share ownership, with trades settled over time. By closing out positions at the end of the day, “gapping risk” is avoided. This is when overnight news can cause a price to open considerably higher or lower than the previous day’s close.
Why do intraday trading?
Market opportunities in a short space of time
Day traders monitor short-term price moves and try to exploit volatility. Many add risk by using leverage to increase the size of their trades. This can mean big returns, but also severe losses in a very short period of time.
Lower broker charges
By closing positions each day, traders will not incur overnight funding charges. There might also be cheaper costs involved, depending on your trading. Always check with your broker about margin costs and commissions.
Using Contract for Differences (“CFDs”) and leverage
Derivatives such as CFDs are quite popular for intraday trading. Without owning the underlying asset, CFDs allow you to speculate on the future market movements of the underlying asset. CFDs are leveraged instruments, and trading with leverage cuts both ways: while it can magnify returns, it also carries the risk of rapid losses. It is always advisable to recognise and analyse the risks involved before trading, as using high leverage can expose traders to a much greater downside risk, potentially resulting in losses exceeding their initial capital.
Who should consider intraday trading?
Intraday trading basics generally involve time, focus and a distinct mindset. A decisive personality and the ability to make quick decisions may suit the high-octane life of a day trader. This is especially true if your strategy involves a high volume of trades over a short period.
Day trading contrasts with traditional long-term investment strategies, in which investors seek to capitalise on price movements over the extended life of a trade.
Strategies of intraday trading
There are numerous styles and strategies for day trading. The most common are:
Swing Trading
These traders look to create opportunities from both upward and downward movements that occur in short time periods. They assume price never goes in one direction during a trend and aim to spot reversals, or “swing highs” and “swing lows”.
Scalping
This strategy often involves making very small but frequent winning positions. A high win rate is a prerequisite for this style, as losses can quickly negate any gains.
Mean reversion
Intraday trades and prices tend to move back towards the historical mean, according to this strategy. Overbought or oversold assets can be measured by technical analysis.
How to start intraday trading
1. Choose a market and instrument you have an interest in
CFDs give you access to hundreds of different products. They are very popular for intraday trades, as you do not need to own the underlying asset.
2. Select some risk management techniques
Tools such as stop-loss and take-profit orders are essential ways of managing risk in your live positions. Intraday trading can be very volatile, so placing a stop-loss order when opening the order is prudent.
Traders often use prominent support or resistance levels as a guide when determining price levels for these orders. Your order size may also need to be adjusted if you choose a higher-frequency strategy. A trading plan which sets out your goals and targets can help.
3. Decide whether to use technical analysis, fundamental analysis or a mix of the two
Technicals suit traders who like to plot and observe price action patterns. News traders will focus on sudden headlines and other market-moving events, such as mergers and acquisitions.
Intraday trading takes time and commitment to achieve consistency. Determine your ambitions and risk management plan, and enjoy the intraday trading journey!
