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Intraday Trading: Everything You Should Know
Iva Kalatozishvili
Business Development Manager
Intraday trading is a trading style limited by one trading session. All positions are opened and closed within one day.
Intraday traders focus on short-term intraday swings and do not hold their positions for long periods of time.
In this article we put an accent on the following issues:
- What does intraday trading mean and how it works?
- What are the differences between basic trading styles?
- What are the pros and cons of intraday trading?
- What are the core principles of intraday trading?
- Which strategies should traders use when opening intraday positions?
Intraday trading falls into the category of basic trading styles that also comprises scalping, swing-trading, and position-trading. What are the main differences?
The Differences Between Basic Trading Styles
Different traders are characterized by different approaches on how to trade, how long to hold a position, and which trading instruments to use when analyzing further price movements. There are four basic trading styles:
- Scalp trading (scalping). Such a style implies holding a position for a very short period of time. Scalp traders hold positions from a few seconds to several minutes. This approach aims to open a lot of orders and take small but frequent profits. Traders need to be fully involved in the market, analyze the smallest price movements, and find the best points to enter and leave the market quickly.
- Day trading (intraday). The main rule of this trading style lies in closing all the positions before the markets close. Traders open and close their positions within one and the same trading session. They get profits from short-term market movements but have more time to analyze the market properly when compared to scalping.
- Swing trading. Such a style includes holding a position for several days or weeks. The main goal of a swing trader is to understand the current market trend and then take advantage of the movement. Traders are looking for either swing highs when an asset’s price rises or swing lows when the price drops down.
- Position trading. This approach is more like investments than trading, as you can hold a position for weeks, months, or even years. Short-term market fluctuations do not affect the predictions position traders make. They focus on long-term market trends and macroeconomic factors.
Key Features of Intraday Trading
- Traders open positions and need to close them within the same trading session.
- The main accent is put on the technical analysis instruments. Traders use combinations of indicators to understand whether an asset’s price is going to rise or fall down within the nearest periods of time.
- The amount of positions is rather high. Intraday traders usually open more than 10 positions and get small profits from each one.
- The average profit for a position is 2-3%.
- Traders utilize different asset classes to open their positions.
Who Is Intraday Trading Suitable For?
On the one hand, intraday trading is one of the widespread styles of opening and holding positions. On the other hand, traders need to understand whether such an approach suits their personal or not. When a trader selects the wrong style, they end up with heavy losses.
As such, what is a portrait of a successful intraday trader?
- A trader makes decisions quickly and is able to analyze large amounts of data in a short period of time.
- A trader is not influenced by stress when working under tight deadlines.
- A trader has a high level of stress resistance, is able to control emotions, and makes decisions with a cool head.
When the necessity to make quick decisions and analyze the market within tight deadlines leads to mistakes and stress, change your trading style to swing or position trading.
Types of Intraday Trading
Intraday trading is a name of a trading style but at the same time it includes several types that differ in approaches, strategies, and possible profits. Here is the list of types of intraday trading:
- momentum trading;
- breakout trading;
- reversal trading;
- news-based trading;
Let’s dive deeper into each type of intraday trading to understand its peculiarities.
Momentum trading
Traders are looking for assets that are about to show strong price movements. Positions are opened in the direction of a current trend, upwards or downwards. The core goal is to ride the wave and wait until the trend is ready for reversal. Momentum trading can be used for all the assets but traders select stocks more often.
Breakout trading
This trading type is based upon the identifying support and resistance levels. Professional traders use different indicators to visualize the channel an asset’s price is moving inside. Those indicators are Keltner Channel, Donchian Channel, Bollinger Bands, and so on. When the price touches the upper or lower border of the channel, there is a high probability that it will go back to the channel. Meanwhile, breaking those borders is a signal for an upcoming trend. Traders open positions when an asset’s price breaks one of the channel borders.
Reversal trading
One trend is sooner or later changed by another one, and all the financial markets work according to this principle. Professional traders rely on technical analysis indicators and graphic patterns to identify price levels where an asset is overbought or oversold. As such, they open positions in the opposite direction waiting for the trend reversal. As for indicators that are used in reversal trading, RSI and Stochastic are the most widespread instruments. When talking about the category of graphic reversal patterns, it includes the Hammer, Hanging man, Shooting star, etc.
News-based trading
As it comes from the type’s name, traders ground their predictions on the news. They monitor key events that happen in financial markets (earnings reports, public presentations of major financial players, updates of different indexes, political, economic, and other events) and understand whether an asset’s price is going higher or lower. When talking about news-based trading, you need to make split-second decisions.
Indicators Used in Intraday Trading
Intraday trading is mostly based on technical analysis; therefore, professional traders rely on diverse indicators and patterns that help them understand further price movements.
Here are the most widespread indicators used in intraday trading:
- Moving Average. Moving averages smooth the price fluctuations and reduce market noises so that traders could understand what is the direction of a current trend. Traders set the necessary period to get a broader view of the ongoing trend.
- Bollinger Bands. The indicator consists of three lines where the central one is the SMA 20 (Simple Moving Average based on the 20-day period). Bollinger Bands show whether an asset is overbought or oversold.
- RSI (Relative Strength Index). Such an indicator is rather close to Bollinger Bands, as traders use the index to understand where an asset is overbought and oversold. RSI shows market situations in grades from 0 to 100.
- MACD (Moving Average Convergence Divergence). The indicator gives traders a signal whether a current trend is going to reverse or continue. The instrument is represented by a histogram that shows markers of bullish and bearish trends.
Effective Strategies for Intraday Trading
The Combination of EMA, MACD, RSI
We need to add the MACD indicator with default settings. Then we use RSI leaving the default settings as well. As for Moving Average, add two MAs – Exponential Moving Average with a 7-day period and another EMA with a 26-day period. On the chart we get the following picture:
Open the positions according to the following criteria:
- EMA 7 crosses EMA 26 from the bottom to the top. The MACD index is going upwards, and the RSI index is higher than 50. Open a long position.
- EMA 26 crosses EMA 7 from the top to the bottom. The MACD index is going downwards, and the RSI index is lower than 50. Open a short position.
The SLM Ribbon Strategy
Such a strategy is both simple and effective. You need to add Moving Average (exponential) indicators only. Select the EMA lines with 8-day period, 13-day period, and 21-day period.
Open the positions according to the following criteria:
- EMA 8 crosses EMA 13 and EMA 21 lines from the bottom to the top. Open a long position on the candle next to the breakout one.
- EMA 8 crosses EMA 13 and EMA 21 lines from the top to the bottom. Open a short position on the candle next to the breakout one.
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The Combination of Parabolic SAR and Moving Average
Add Parabolic SAR leaving the default settings. Then utilize the SMA line with a 20-day period.
Open the positions according to the following criteria:
- When a bullish candle breaks the SMA 20 line and closes above it and Parabolic SAR confirms the signal (yellow circle below), open a long position.
- When a bearish candle breaks the SMA 20 line and closes below it and Parabolic SAR confirms the signal (yellow circle above), open a short position.
The Pros and Cons of Intraday Trading
What are the main advantages and weak points of this trading style?
The main pros of intraday trading:
- Traders are able to get profits within one trading session. They earn from the smallest price fluctuations.
- Traders use minimum capitals due to high leverages. This trading style is possible from some $10-$20.
- Stop-loss and take-profit orders make it possible to control risks. Furthermore, traders do not hold their positions overnight; which is why they totally control their positions.
The cons of intraday trading are as follows:
- Intraday trading is rather complicated; this is why traders need to have profound knowledge of how technical analysis works.
- Low timeframes (M1, M5, M15, etc.) are characterized by frequent “noises”, and traders may get false signals.
- The style requires a trader to be able to analyze giant scopes of information and make quick decisions.
- Intraday trading is linked with the high load on analytical and emotional activity of a trader. There appears the risk of overtrading.
Bottom Line
Intraday trading falls into the category of the most popular trading styles. Traders open and close their positions within one trading session. Such a style offers high profits within a short period of time. Instead, a trader needs to be fluent in technical analysis and able to make quick decisions based on the received signals.
