How intraday trading works india
We briefly discussed shorting in Module 1. However in this chapter we will look at shorting in greater detail. Shorting is a tricky concept because we are not used to shorting in our day to day transaction.
For example imagine this transaction — You buy an apartment today for let us say Rs. X, sell it 2 years later for Rs. The profit made on the transaction is the incremental value over and above Rs. X, which happens to be Rs. This is a simple and a highly intuitive transaction.
In fact most of the day to how intraday trading works india transactions requires us to buy something first and sell it later maybe for a profit or a loss. These are simple to understand transactions and we are used to it. So what would compel a trader to sell something first and then buy it later? Well, it is quite simple — When we believe the price of an asset such as a stock is likely to increase we buy the stock first and sell it later.
However, when we believe the price of the stock is going to decline, we usually sell it first and buy it later! Well, let me try giving you a rudimentary analogy just so that you can get the gist of the concept at this stage.
Imagine your friend and you how intraday trading works india watching a nail biting India Pakistan cricket match. Both of you are in a mood for a little wager. You bet that India is going to win the match, and your friend bets that India will lose the match. Quite naturally this means you make money if India wins. Likewise your friend would make money if India were to lose the match. Now for a minute think of the India as in the Indian cricket team in this context as a stock trading in the stock market.
When you do so, your bet is equivalent to saying that you would make money if the stock goes how intraday trading works india India wins the matchand your friend would make money if the stock goes down India loses the match. In market parlance, you are long on India and your friend is short on India. May not be I suppose, but I would imagine a few unanswered questions crawling in your mind. If you are completely new to shorting, just remember this one point for now — When you feel the price of a stock is likely to decline, you can make money by shorting the stock.
To short stock or futures, you will have to sell first and buy later. Before we understand how one can short a stock in the futures market, how intraday trading works india need to understand how shorting works in the spot market.
Think about the following hypothetical situation —. Now given this outlook, the trader wants to profit by the expected price decline. Hence he decides to short the stock. Let us understand this better by defining the trade —. As we know, when one shorts a stock or stock futures, the expectation is that the stock price goes down and therefore one can profit how intraday trading works india of the falling prices. So from the table above the idea is to short the stock at Rs.
On the trading platform when you are required to short, all you need to do is highlight the stock or futures contract you wish to short and press F2 on your trading platform. Doing so invokes the sell order form; enter the quantity and other details before you hit Submit. When you hit submit, the order hits the exchange and assuming it gets filled, you would have created a short open position for yourself.
Anyway, now think about this — When you enter a trading position, under what circumstances would you make a loss? Well, quite obviously you would lose money when the stock price goes against your expected direction. For this reason whenever you short, the stoploss price is always higher than the price at which you have shorted the stock.
Therefore from the table above you can see that the short trade entry is Rs. Now, after initiating the short trade at Rs. In this case the stock has moved as per the expectation. The stock has fallen from Rs. Since the target has been achieved, the trader is expected to close the position. As we know in a short position the trader is required to —. In the whole process, the trader would have made a profit equal to the differential between the selling and buying price — i.
If you look at it from another angle i. It is just that the trader has reversed the transaction order by selling first and buying later. In this case the stock has gone higher than the short price of Rs.
Recollect when you short, for you to profit the stock needs to decline in price. If the stock price goes up instead then there would be a loss. In this case the stock has gone up, hence there would be a loss —. In the whole process the trader would have suffered a loss of Rs. If you look how intraday trading works india it from the regular buy first sell later angle — this transaction is as good as buying at Rs.
Hopefully the above two scenarios should have convinced you about the fact that, when you short you make money when the price goes down and you lose when the price increases. Shorting in the spot market has one restriction — it strictly has to be done on an intraday basis. Meaning you can initiate how intraday trading works india short trade anytime during the day, but you will have to buy back the shares square off by end of the day before the market closes.
You cannot carry forward the short position for multiple days. To understand why shorting in the spot how intraday trading works india is strictly an intraday affair we need to understand how the exchange treats the short position.
When you short in the spot market, you obviously sell first. The moment you sell a stock, the backend process would alert the exchange that you have how intraday trading works india a particular stock. The exchange does not differentiate between a regular selling of stock from DEMAT account and a short sale.
From their perspective they are of the opinion that you have sold the shares which would obligate you to deliver the same. However the exchange would know about your obligation only after the market closes and not during the market hours.
Keep the above discussion in the back of your mind. Now for a moment let us assume you have shorted a stock how intraday trading works india hope to benefit from the price decline. After you short, the price has not declined as expected and hence you decide to wait for another day. However at the end of the day, exchange would figure out that you have sold shares during the day, hence you would be how intraday trading works india to keep these shares ready for delivery. However you do not have these how intraday trading works india for meeting your delivery obligation.
This means you will default against your obligation; how intraday trading works india there would be a hefty penalty for this default. Under a short delivery situation, the exchange would take up the issue and settle it in the auction market. Also, this leads us to an important thought — the exchange anyway checks for the how intraday trading works india after the market closes.
Hence for this reason, shorting in spot market has to be done strictly as an intraday trade without actually carrying forward the delivery obligation. So does that mean all short positions have to be closed within the day? A short position created in the futures market can be carried forward overnight.
Shorting a stock how intraday trading works india the futures segment has no restrictions like shorting the stock in the spot market. In fact this is one of the main reasons why trading in futures is so popular.
So if the underlying value is going down, so would the futures. This means if you are bearish about a stock then you can initiate a short position on its futures and hold on to the position overnight. Similar to depositing a margin while initiating a long position, the short position also would require a margin deposit. The margins are similar for both the long and short positions and they do not really change.
The lot size is The table below shows the stock price movement over the next few how intraday trading works india and the respective M2M —. The two lines how intraday trading works india in red highlights the fact that they are loss making days. To get the overall profitability of the trade we could just add up all the M2M values —. So, shorting futures is very similar to initiating a long futures position, except that when you short you profit only if the price declines.
Besides this, the margin requirement and the M2M calculation remains the same. Shorting is a very integral part of active trading. I would suggest you get as comfortable with initiating a short trade as you would with a long trade. If you are attempting something without knowledge then of course its gambling: Technical do play a role in options, will talk more about it when we take up the module on Options.
One correction ref sec: Dear sir u are doing great job. This is query related to Fundamental Analysis. Have answered the same here — http: How intraday trading works india for the same since how intraday trading works india Maybe in another 10 days time. Next one due in a day or 2! We are onward to warping up the futures module now. Yes, you can do that.
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Day trading is speculation in securitiesspecifically buying and selling financial instruments within the same trading day. Strictly, day trading is trading only within a day, such that all positions are closed before the market closes for the trading day. Many traders may not be so strict or may have day trading as one component of an overall strategy.
Traders who participate in day trading are called day traders. Traders who trade in this capacity with the motive of profit are therefore speculators. The methods of quick trading contrast with the long-term trades underlying buy how intraday trading works india hold and value investing strategies. Some of the more commonly day-traded financial instruments are stocksoptionscurrenciesand a how intraday trading works india of futures contracts such as equity index futures, interest rate futures, currency futures and commodity futures.
Day trading was once an activity that was exclusive to financial firms and professional speculators. Many day traders are bank or investment firm employees working as specialists in equity investment and fund management. However, with how intraday trading works india advent of electronic trading and margin tradingday trading is available to private individuals. Some day traders use an intra-day technique known as scalping that usually has the trader holding a position for a few minutes or even seconds.
Most day traders exit positions before the market closes to avoid unmanageable risks—negative price gaps between one day's close and the next day's price how intraday trading works india the open. Another reason is to maximize day trading buying power. Day traders sometimes borrow money to trade. This is called margin trading. Since margin interests are typically only charged on overnight balances, the trader may pay no fees for the margin benefit, though still running the risk of a margin call.
The margin interest rate is usually based on the broker's call. Because of the nature of financial leverage and the rapid returns that are possible, day trading results can range from extremely profitable to extremely unprofitable, and high-risk profile traders can generate either huge percentage returns or huge percentage losses.
Because of the high profits and losses that day trading makes possible, these traders are sometimes portrayed as " bandits " or " gamblers " by other investors. The common use of buying on margin using borrowed funds amplifies gains and losses, such that substantial losses or gains can occur in a very short period of time. In addition, brokers usually allow bigger margins for day traders.
Because of the high risk of margin use, and of other day trading practices, a day trader will often have to exit a losing position very quickly, in order to prevent a greater, unacceptable loss, or even a disastrous loss, much larger than his or her original investment, or even larger than his or her total assets.
Originally, the most important U. A trader would contact a stockbroker, who would relay the order to a specialist on the floor of the NYSE. These specialists would each make markets in only a handful of stocks. The specialist would match the purchaser with another broker's seller; write up physical tickets that, once processed, would effectively transfer the stock; and relay the information back to both brokers. One of the first steps to make day trading of shares potentially profitable was the change in the commission scheme.
Inthe United States Securities and Exchange Commission SEC made fixed commission rates illegal, giving rise to discount brokers offering much reduced commission rates.
Financial settlement periods used to be much longer: Before the early s at the London Stock Exchangefor example, stock could be paid for up to 10 working days after it was bought, allowing traders to buy or sell shares at the beginning of a settlement period only to sell or buy them before the end of the period hoping for a rise in price. This activity was identical to modern day trading, but for the longer duration of the settlement period.
But today, to reduce market risk, the settlement period is typically two working days. Reducing the settlement period reduces the likelihood of defaultbut was impossible before the advent of electronic ownership transfer. The systems by which stocks are traded have also evolved, the second half of the twentieth century having seen the advent of electronic communication networks ECNs.
These are essentially large proprietary computer networks on which brokers could list a certain amount of how intraday trading works india to sell at a certain price the asking price or "ask" or offer to buy a certain amount of securities at a certain price the "bid".
The first of these was Instinet or "inet"which was founded in as a way for major institutions to how intraday trading works india the increasingly cumbersome and expensive NYSE, also allowing them to trade during hours when the exchanges were closed.
Early ECNs such as Instinet were very unfriendly to small investors, because they tended to give large institutions better prices than were available to the public. This resulted in a fragmented and sometimes illiquid market. The next important step in facilitating day trading was the founding in of NASDAQ —a virtual stock exchange on which orders were transmitted electronically.
Moving from paper share certificates and written share registers to "dematerialized" shares, computerized trading and registration required not only extensive changes to legislation but also the development of the necessary technology: These developments heralded the appearance of " market makers ": A market maker has how intraday trading works india inventory of stocks to buy and sell, and simultaneously offers to buy and sell the same stock.
Obviously, it will offer to sell stock at a higher price than the price at which it offers to buy. This difference is known as the "spread". The market maker is indifferent as to whether the stock goes up or down, it simply tries to constantly buy for less than it sells. A persistent trend in one direction will result in a loss for the market maker, but the strategy is overall positive otherwise they would exit the business. Today there are about firms who participate as market makers on ECNs, each generally making a market in four to forty different stocks.
Another reform made was the " Small Order Execution System ", or "SOES", which required market makers to buy or sell, immediately, small orders up to shares at the market maker's listed bid or ask. In the late s, existing ECNs began how intraday trading works india offer their services to small investors.
New brokerage firms which specialized in serving online traders who wanted to trade on the ECNs emerged. Archipelago eventually became a stock exchange and in was purchased by the NYSE. Moreover, the trader was able in to buy the stock almost instantly and got it how intraday trading works india a cheaper price.
ECNs are in constant flux. New ones are formed, while how intraday trading works india ones are bought or merged. As of the end ofthe most important ECNs to the individual trader were:. This combination of factors has made day trading in stocks and stock derivatives such as ETFs possible.
The low commission rates allow an individual or small firm to make a large number of trades during a single day. The liquidity and small spreads provided by ECNs allow an individual to make near-instantaneous trades and to get favorable pricing. The ability for individuals to day trade coincided with the extreme bull market in technological issues from to earlyknown as the Dot-com bubble. In March,this bubble burst, and a large number of less-experienced day traders began to lose money as fast, or faster, than they had made during the buying frenzy.
The NASDAQ crashed from back to ; many of the less-experienced traders went broke, although obviously it was possible to have made a fortune during that time by shorting or playing on volatility. In parallel to stock trading, starting at the end of the s, a number of new Market Maker firms provided foreign exchange and derivative day trading through new electronic trading how intraday trading works india. These allowed day traders to have instant access to decentralised markets such as forex and global markets through derivatives such as contracts for difference.
Most of these firms were based in the UK and later in less restrictive jurisdictions, this was in part due to the regulations in the US prohibiting this type of how intraday trading works india trading. These firms typically provide trading on margin allowing day traders to take large position with relatively small capital, but with the associated increase in risk.
Retail forex trading became a popular how intraday trading works india to day trade due to its liquidity and the hour nature of the market. The following are several basic strategies by which day traders attempt to make profits. Besides these, how intraday trading works india day traders also use contrarian reverse strategies more commonly seen in algorithmic trading to trade specifically against irrational behavior from day traders using these approaches. It is important for a trader to remain flexible and adjust their techniques to match changing market conditions.
Some of these approaches how intraday trading works india shorting stocks instead of buying them: There are several technical problems with short sales—the broker may not have shares to lend in a specific issue, the broker can call for the return of its shares at any time, and some restrictions are imposed in America by the U. Securities and Exchange Commission on short-selling see uptick rule for details.
Some of these restrictions in particular the uptick rule don't apply to trades of stocks that are actually shares of an exchange-traded fund ETF. Trend followinga strategy used in all trading time-frames, assumes that financial instruments which have been rising steadily will continue to rise, and vice versa with falling. The trend follower buys an instrument which has been rising, or short sells a falling one, in the expectation that the trend will continue.
Contrarian investing is a how intraday trading works india timing strategy used in all trading time-frames. It assumes that financial instruments which have been rising steadily will reverse and start to how intraday trading works india, and vice versa.
The contrarian trader buys an instrument which has been falling, or short-sells a rising one, in the expectation that the trend will change. Range trading, or range-bound trading, is a trading style in which stocks are watched that have either been rising off a support price or falling off a resistance price.
That is, every time the stock hits a high, it falls back to the low, and vice versa. Such a stock is said to be "trading in a range", which is the opposite of trending.
A related approach to range trading is looking for moves outside of an established range, called a breakout price moves up or a breakdown price moves downand assume that once the range has been broken prices will continue in that direction for some time.
Scalping was originally referred to as spread how intraday trading works india. Scalping is a trading style where small price gaps created by the bid-ask spread are exploited by the speculator. It normally involves establishing and liquidating a position quickly, usually within minutes or even seconds. Scalping highly liquid instruments for off-the-floor day traders involves taking quick profits while minimizing risk loss exposure.
The basic idea of scalping is to exploit the inefficiency of the market when volatility increases and the how intraday trading works india range expands. When stock values suddenly rise, they short sell securities that seem overvalued. Rebate trading is an equity trading style that uses ECN rebates as a primary source of profit and revenue. Most ECNs charge commissions to customers who want how intraday trading works india have their orders filled immediately at the best prices available, but the ECNs pay commissions to buyers or sellers who "add liquidity" by placing limit orders that create "market-making" in a security.
Rebate traders seek to make money from these rebates and will usually maximize their returns by trading low priced, high volume stocks. This enables them to trade more shares and contribute more liquidity with a set amount of capital, while limiting the risk that they will not be able to exit a position in the stock.
The basic strategy of news playing is to buy a stock which has just announced good news, or short sell on bad news. Such events provide enormous volatility in a stock and therefore the greatest chance for quick profits or losses. Determining whether news is "good" or "bad" must be determined how intraday trading works india the price action of the stock, because the market reaction may not match the tone of the news itself.
This is because rumors or estimates of the event like those issued by market and industry analysts will already have been circulated before the official release, causing prices to move in anticipation. The price movement caused by the official news will therefore be determined by how good the news is relative to the market's expectations, not how good it is in absolute terms. Keeping things simple can also be an effective methodology when it comes to trading.
These traders rely on a combination of price movement, chart patterns, volume, and other raw market data to gauge whether or not they should take a trade.