Explaining Intraday Trading

Intraday trading is defined as trading that takes place “within the day” only, with all positions being closed before markets end on a single day. This is in contrast to “swing” trading, which enables investors to hold onto securities for months and even years. Securities that are available to trade within the day include stocks and exchange-traded funds.

Advantages and disadvantages

Intraday trading can mitigate risks for investors as negative overnight news will not have an impact on security prices. Examples of out-of-business-hours developments that may affect positions include quarterly earnings reports posted by corporations, which generally arrive after the final bell; new economic data; and broker upgrades and downgrades.

The short-term nature of day trading allows investors to focus on a more narrow set of fundamentals, so many will depend on snap judgments and predictions and critical thinking to drive profits rather than looking at the bigger picture. This also opens up the possibility of short selling. Profits can be made in either direction.

There are pros and cons to this approach. A swing trader will have more time to determine whether a position will support their research. They can also be safe in the knowledge that the efficiency of markets will mean that prices will reflect securities as they should after a certain period of time. “Here today, gone tomorrow” is a relevant mantra for day traders as securities and positions need to bear fruit within the day. There is no waiting for a later date.

The financial leverage inherent in day trading means that rapid returns are possible, but the flip side is also true – poor strategy can lead to huge losses. Incompetent money management and inadequate risk capital can make day trading even more challenging.

Remember, day trading is different from general stock selection and long-term investments such as mutual funds. Positions are closed out quickly, so smart and fast decisions need to be made for success. Market watchers should also use a weekly stock calendar to keep track of important dates, events, and reports.

Real-time information and strategies

Day traders use real-time information to benefit from the fluctuations in price, with charts ranging from one minute to 60 minutes in length being the primary source. Shorter charts are generally used for scalping, which is a strategy rooted in the desire to drive a range of profits from very small price changes. Traders use this strategy as they often believe that small moves in the market are easier to track than large moves. However, it does require precision timing and execution. Hold times can vary from just a few seconds to several hours. A few other strategies include:

• Range trading – support and resistance levels for securities that consistently pivot between high and low prices are used to decide whether to buy or sell.
• News based – traders keep track of developing news stories and events to identify heightened volatility in stocks and possible trading opportunities.
• High-frequency – complex algorithms are used to make the most of the small market inefficiencies within a single day.