71% investors lost money in intraday trading in FY23: Here’s what beginners need to know

Understanding intraday trading: Intraday trading, often touted as a way to make quick profits, is a complex and risky venture. A recent study by the Securities and Exchange Board of India ( SEBI ) reveals that 71 per cent of 70 lakh individual investors engaged in intraday trading in the equity cash segment lost money in financial year 2022-23, with an average loss of Rs 5,371. For newcomers to the stock market, it is important to understand the nuances of intraday trading before diving in.

What is Intraday Trading?

Intraday trading involves buying and selling stocks within the same trading session. Unlike long-term investing, where stocks are held for extended periods, intraday traders close all their positions by the end of the trading session, avoiding overnight market risks. Here’s an example to illustrate:

• Imagine Priya, an investor, buys 500 shares of a company at Rs 200 each in the morning.
• Throughout the day, the stock price fluctuates, and by early afternoon, it rises to Rs 210.
• Priya decides to sell all her shares at this price.
• Her profit per share is Rs 10 (Rs 210 - Rs 200).
• With 500 shares, her total profit for the day would be Rs 5,000.

Intraday trading requires precise timing and a good understanding of market movements to capitalise on these small price fluctuations.

Why do so many investors lose money?

The SEBI study’s findings are a sobering reminder that intraday trading is not as straightforward as it seems.

“A majority of traders incur losses due to several key factors. Market volatility is a major challenge, as stock prices can swing dramatically within minutes, making accurate predictions difficult. Many new traders lack the necessary knowledge and experience to understand market dynamics and effective trading strategies,” Ravi Singh, SVP - Retail Research, Religare Broking Ltd told Republic Business.

"Emotional trading, driven by fear and greed, often leads to poor decisions, such as panicking during market dips or becoming overly optimistic during rallies. High transaction costs from frequent buying and selling, including brokerage fees and taxes, can erode profits. Additionally, the use of leverage, or borrowed funds, can amplify both potential profits and losses, increasing the overall risk of intraday trading," Singh added.

Top intraday trading strategies for beginners

Intraday trading, or day trading, is all about making precise trades within a single day. To succeed, you'll need a solid strategy, technical analysis, and effective risk management.

Here’s a breakdown of some intraday trading strategies recommended for beginners looking to get started. Siddharth Maurya, Founder & Managing Director of Vibhavangal Anukulakara Pvt Ltd, told Republic Business that understanding these strategies is crucial for building a strong trading foundation and improving your market skills.

Moving Average Crossover Strategy

This strategy involves using two moving average lines that cross each other. When these lines intersect, it can indicate a change in the market trend. Although it may not pinpoint exact highs or lows, it helps in identifying overall trends. This method works best in trending markets but may not be as effective in stable or range-bound conditions.

Reversal Trading Strategy

Also known as Pull Back Trading, this strategy bets on stocks that are expected to reverse their current trend. Traders look for stocks at extreme highs or lows and anticipate a change in direction. Using trend lines and technical indicators like moving averages (MA) and MACD, traders aim to identify these reversal points.

Momentum Trading Strategy

Momentum trading focusses on stocks showing strong price movements. Traders look for stocks with high volatility, using stock scanners to identify them. The idea is that stocks with significant momentum will continue to move in the same direction until the momentum shifts. This strategy works well during high-volume trading hours.

Gap and Go Trading Strategy

This strategy targets stocks that open significantly higher or lower than their previous closing price. Known as "gappers," these stocks often move rapidly due to news or other events. Traders use pre-market scanners to find these stocks and trade them as they continue to move in the direction of the gap.

Bull Flag Trading Strategy

The bull flag pattern is a chart pattern indicating a continuation of an uptrend. After a strong price movement, the stock consolidates within parallel trend lines before continuing its upward movement. Traders look for these patterns to enter trades, betting that the uptrend will resume.

Pullback Trading Strategy

Pullback trading involves buying stocks that temporarily move against the overall trend. This strategy capitalises on the temporary dips in strong stocks, allowing traders to buy at a lower price before the trend continues. It's important to differentiate pullbacks from complete trend reversals.

Breakout Trading Strategy

Breakout trading focusses on entering trades when the price moves beyond established resistance or support levels. This strategy aims to capture price movements that follow the breakout. Quick entry and exit are crucial, as breakouts often lead to fast and impulsive market movements.

Pivot Point Strategy

Pivot points help traders identify potential support and resistance levels. By calculating these points, traders can predict price movements and set entry and exit points. This strategy is useful for both range-bound and breakout traders.

CFD Strategy

CFDs, or Contracts for Difference, are a trading instrument that allows speculation on various markets without owning the underlying assets. Traders use CFDs to bet on price movements with leverage, meaning they can control larger positions with a smaller deposit. However, leverage increases both potential gains and losses.

Scalping Strategy

Scalping involves making numerous small trades to profit from minor price changes. This strategy requires precise timing and quick decision-making. While it may not offer huge gains from single trades, the accumulation of small profits can be substantial over time.

Key tips for market gains

Singh stressed the importance of choosing liquid shares for intraday trading, as these can be bought or sold quickly before the end of the trading day, aiding in capturing potential gains from significant price movements.

He also advised setting stop-loss limits to minimise potential losses; for instance, if a stock bought at Rs 1,500 is set with a stop-loss at Rs 1,480, it will automatically sell if the price falls, thus limiting the loss. Singh cautions against volatile stocks unless you have a deep understanding of the specific stock or sector, and he suggests focusing on correlated stocks tied to a broader index or sector for clearer market insights.

Transparency in the companies you invest in is crucial, as firms providing ample information reduce the risk of making ill-informed decisions. Lastly, while news-sensitive stocks can offer trading opportunities, Singh warned that they can react unpredictably to news, making it essential to carefully monitor their movements to avoid unexpected losses.