The promise of making profits within the span of a single trading day has attracted more retail participants to intraday equity trading in India than perhaps any other market segment. The accessibility of trading apps with real-time charting, one-tap order execution, and leverage facilities has made intraday trading feel approachable to investors who have no prior experience in financial markets. Yet the demat account data showing the proportion of intraday traders who consistently profit tells a story that runs directly counter to the impression created by broker marketing and social media success stories. Understanding the genuine landscape of intraday trading – its mechanics, its challenges, and its realistic outcomes for most practitioners – is essential before any investor commits time and capital to this activity.
The Mechanics of Intraday Trading and Leverage
Intraday trading refers to buying and selling securities within the same trading session, with all positions squared off before the market closes at three-thirty in the afternoon. Unlike in the case of delivery-based investing, where the investor actually gets the securities transferred into his account, in intraday trading, the settlement happens net – meaning only the gains or losses are transferred and not the securities. Thus, brokers can let you leverage your intraday trading and allow you to take positions worth multiple times your cash balance in the trading account.
The leverage on offer for intraday trading varies between brokers and stocks – large cap stocks that are highly liquid usually allow higher leverage as compared to small cap stocks. The leverage on offer while intraday trading can work wonders if the stock moves in your desired direction; it can also lead to disaster if the stock moves in the opposite direction and you don’t get out in time. Brokers usually square off your positions automatically when you hit the margin limit to prevent you from losing more than the cash balance in your trading account. But in case of rapidly fluctuating markets, these automatic square-offs can happen at much worse prices than you anticipated, leading to huge losses.
Why Do Most Retail Intraday Traders Underperform
The disadvantages that retail traders face while intraday trading are so huge that it’s surprising that they even make profits. Professional traders, hedge funds, proprietary desks at various banks and algorithmic trading desks at various firms have an unfair advantage over the retail trader. They trade with much better tools, have direct access to market data that is delayed by mere milliseconds, have better risk management tools and also have teams of quants that build trading strategies for them. The average retail trader does not have access to such tools and trading strategies.
On top of the unfair advantages that institutional traders have, the retail traders also have to pay transaction costs for each trade that they make. While the flat brokerage charged on trades is negligible, the amount paid in exchange transaction charges, securities transaction tax, SEBI charges and GST on the trades adds up. Unless the trader makes sufficient profits, he/she will always remain at a loss after factoring in all transaction costs. Frequent intraday trading will mean multiple round trips (buy and sell) and the transaction costs will eat into the profits. Most beginner traders do not factor in all the costs and the profits that they eventually make get reduced by these costs.
Discipline, Risk Management & The Importance of Stop Loss
The most successful retail intraday traders are those that have a strict risk management policy and do not deviate from it. One such risk management tool in intraday trading is the stop loss – a price at which the trader will get out of a losing trade. Most beginner traders set a stop loss but revise it upwards when losses start to mount. This happens because the trader believes that his original stop loss was too tight and he wants to hold on to the trade as he thinks that the stock will soon reverse. The psychology of trading leads to him taking too big a loss instead of a small one.
Another important risk management technique is position sizing. Most successful intraday traders do not risk more than 1-2% of their capital in a single trade. This way, even if the trader has a series of losing trades, he will be in a position to continue with his trading activity. A trader who has say Rs. 50,000 as his capital will risk only up to Rs. 1,000 per trade. This way a series of say 5 consecutive losing trades will only slash the capital by Rs. 5,000 leaving the trader with 90% of his capital intact.
Paper Trading Before Actually Trading With Real Money
Most traders get tempted to start trading real money immediately. A better idea is to start with paper trading – simulating real trades without actually investing real money. Most analytical platforms provide a feature that allows the trader to track their hypothetical trades and see how they would have fared in real markets.
This helps the trader identify whether his trading strategy actually works or if he is just lucky to have made profits because of some good trades.
Using this paper trading feature is a great way for the trader to understand how his trading strategy works across varying market conditions. Only when the trader is convinced that he has a winning strategy (one that generates more profits than losses), he should move to trading real money. The trader should ideally spend about 3-6 months paper trading and keep a log of his trades, recording reasons why he entered and exited, the trade price, exit price and his analysis of the trade before moving ahead. Only then should he actually put real money to trade. The amount traded should also be much lower than the amount used in paper trading, and the trader should stick to his risk management and position sizing rules at all times. Trading intraday is not a skill that is acquired in a day or two by watching a few videos or reading a few articles. It is a skill and an art that needs to be mastered over a period of a few years.
