Table of Contents
- What Is Intraday?
- Key Takeaways on Intraday Trading
- Understanding Intraday Trading Fundamentals
- Exploring Key Intraday Trading Strategies
- Pros and Cons of Intraday Trading
- Understanding Mutual Funds vs. Intraday Pricing
- Real-Life Example of Intraday Trading
- How Do Day Traders Make Money?
- What Are the Risks of Intraday Trading?
- Why Can't Day Traders Trade Mutual Funds?
- The Bottom Line
What Is Intraday?
Let me explain intraday to you directly: it means 'within the day' in the financial world, referring to securities like stocks and ETFs that trade during regular business hours. You should know that intraday also covers the highs and lows an asset's price hits throughout the day, which is crucial for short-term traders like day traders who make multiple trades in one session and close everything before the market shuts down.
Key Takeaways on Intraday Trading
Intraday involves securities trading within business hours, and day traders monitor them closely for quick profits. They rely on strategies like scalping, range trading, and news-based trading to handle price fluctuations. One clear benefit is avoiding negative overnight news, with options for tight stop-loss orders and more leverage. But remember, the main risk is rapid losses, especially from high commission costs on frequent trades. Also, mutual funds don't work for intraday because they're priced only at the end of the day, unlike ETFs.
Understanding Intraday Trading Fundamentals
When I talk about intraday, I'm often referring to the new highs and lows of a security during the session—for instance, a new intraday high means it reached a peak compared to other prices that day, and sometimes it matches the closing price. As a trader, you pay close attention to these movements using real-time charts to profit from short-term fluctuations. You might use one-, five-, 15-, 30-, or 60-minute charts; scalping often sticks to one- and five-minute ones for fast trades, while other strategies could hold for hours but still carry high risks.
Here's a fast fact: scalping is about making many trades per day to profit from small stock price movements. Volume weighted average price (VWAP) orders are common in intraday trading to boost efficiency, exposing your order to various prices throughout the day and giving an average trading price for the security.
Exploring Key Intraday Trading Strategies
You have several strategies to choose from in intraday trading. Scalping aims for numerous small profits on tiny price changes all day. Range trading uses support and resistance levels to decide when to buy or sell. News-based trading seizes opportunities from volatility around news events. High-frequency trading employs algorithms to exploit small or short-term market inefficiencies. All these rely on timing your trades based on intraday price shifts, sometimes just minutes apart.
Pros and Cons of Intraday Trading
The primary benefit is that your positions dodge negative impacts from overnight news, like economic reports or broker changes outside trading hours. Other advantages include using tight stop-loss orders to limit losses, accessing more margin for greater leverage, and gaining hands-on experience from frequent trades.
On the downside, there might not be enough time for a position to profit before you have to close it out. Losses can pile up fast if trades go wrong, especially with margin involved. Some assets, like mutual funds, are off-limits for intraday. Plus, all those trades rack up commission costs that can erode your profits.
Pros
- Positions are unaffected by risk from overnight news or off-hours broker moves.
- Tight stop-loss orders can protect positions.
- Regular traders have access to increased leverage.
- Numerous trades increase hands-on learning experience.
Cons
- Frequent trades mean multiple commission costs.
- Some assets are off-limits, like mutual funds.
- There may not be sufficient time for a position to realize a profit before it has to be closed out.
- Losses can mount quickly, especially if margin is used to finance purchases.
Understanding Mutual Funds vs. Intraday Pricing
Mutual funds aren't built for intraday trading; they're for long-term investing and require broker handling. Their price, the net asset value (NAV), is set once at market close, based on asset values minus liabilities. So, they don't have intraday pricing since values change throughout the day and managers trade accordingly. In contrast, ETFs are passively managed and priced on their intraday market value, making them suitable for this.
Real-Life Example of Intraday Trading
Take April 4, 2022, for Apple Inc. (AAPL): shares opened at $174.57 and closed at $178.44. During the day, they hit a low of $174.44 and a high of $178.49. Traders analyze these movements for patterns or gaps—sudden jumps without trades in between.
How Do Day Traders Make Money?
Day traders profit by trading assets on small price fluctuations throughout the day, often using high leverage. It's risky and can lead to big gains or losses based on positions and leverage.
What Are the Risks of Intraday Trading?
The biggest risk is losing large sums quickly due to fluctuating prices. It's hard to achieve long-term profits, especially for beginners.
Why Can't Day Traders Trade Mutual Funds?
Mutual funds price only at day's end, so no intraday fluctuations to trade on. They're for long-term investors and handled through brokers or the fund company.
The Bottom Line
Intraday trading is all about securities' price movements in a single day, letting you capitalize on short-term shifts with strategies like scalping or range trading. You get flexibility with stop-losses and avoid overnight news risks, but watch out for high costs and quick losses from margin. Understand the opportunities and risks if you're getting into this.
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