Intraday Trading: The Complete Guide

The advent of online trading available to anyone with a smartphone or tablet has opened up 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 of buying and selling CFDs on currencies, stocks and different financial assets. By trading during the day, traders hope to create opportunities on sharp movements in price action. 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 in their decision making. 

One of the key prerequisites to successful intraday trading is the implementation of a prudent risk management plan which helps cut down losses and prevent losses from getting out of control Strategies such as the use of stop loss and take profit orders would enable traders to understand what price they are willing to pay and at what price they are willing to sell.  On the contrary, without having a risk management mindset, traders may be more prone to let emotions impact their decision-making, which is often disastrous when it comes to 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 will require a trader to square off open positions at the end of the day.  If the trader is using margin, then the trader’s long or short position will need to be offset with 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 ownership of shares with the usual settlement of trades over a period of 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 an additional level of 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 because while it can magnify the rate of return, it also comes with the high risk of quick losses. It is always advisable to recognise and analyse the risks involved ahead of trading, as using high leverage could expose traders to a much higher downside risk, potentially resulting in losses greater than their initial capital investment. 

Who should consider intraday trading? 

Intraday trading basics generally involve time, focus and a distinct mindset. A decisive personality and someone who makes quick decisions may suit the high-octane life of a day trader. This is especially the case if your strategy entails a high volume of trades in a short period of time. 

Day trading contrasts with traditional long-term investment strategies where investors seek to create opportunities from price moves over the extended life of a trade. 

Strategies of intraday trading

There are numerous styles and strategies of trading to use as a day trader. The most common are:

Swing Trading

these traders look to create opportunities from both the up and down movements that take place 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 a stop loss order placed when opening an order is prudent. 

Traders often use prominent lines of support or resistance as a guide when figuring out 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 those traders who like to plot and observe patterns in price action. News traders will focus on sudden headlines and other market moving events like mergers and acquisitions. 

Intraday trading takes time and commitment to achieve consistency. Determine your ambitions, a risk management plan and enjoy the intraday trading journey!