Risk Management in Intraday Trading

Buying and selling an asset on the same day is known as intraday trading. There is no asset delivery since all open positions are closed at the end of the day. This lets you apply leverage and lowers your trading expenses, such as brokerage charges. Leverage allows you to manage massive holdings with little margin deposits, just a small portion of the trade value. 

This trading strategy provides several advantages but carries a certain amount of risk. Leverage and excessive market volatility are two main elements associated with intraday trading. For this reason alone, having appropriate measures for managing trading risk is essential. 

What is Risk Management in Trading?

Risk management refers to a method or a collection of approaches that help you control the risks of trading. If you have strong risk management strategies, you can minimise trading losses from the market going against your expectations. 

Enjoy No Brokerage* on Intraday Trading

Start Intraday Trading

* By signing up you agree to our Terms and Conditions

Intraday Risk Management Tools and Strategies

Intraday traders select a predetermined trading window. The "Stop Loss" and "Take Profit" strategies assist you in making intraday profits while lowering the associated risk. 

• Take Profit: Assume that you purchased a share for Rs 1000. You will plan to make Rs. 100 but would rather not lose more than Rs. 50. When your targeted profit level is reached, a take-profit order will guarantee that the transaction is terminated as quickly as possible. Your take-profit order in this scenario would be placed at Rs 1100 per share.
• Stop Loss: Utilising the above example, a stop loss may be established at Rs 950 per share. Your deal immediately ends, and the stocks are sold when the stock drops by Rs 50.
• Trailing stop loss: A trader might preserve profit using a trailing stop loss order. When you use a trailing stop loss, the deal stays open as long as the market moves to your advantage. The trailing stop loss is triggered when the stock price peaks and begins to decline, which in turn causes the stocks to be sold.
• Support and resistance: The range in which a stock is anticipated to move. Assume that the stock price is Rs 1000, with resistance at Rs 1350 and support at Rs 850. The analysts can estimate support and resistance prices, which you may utilise to determine your stop loss and take profit levels.
• Candlesticks: Candlesticks graphically represent share price changes. By analysing candlestick patterns, traders may forecast the stock's short-term movement and future course. These patterns serve as a point of reference when making intraday trading decisions.

Why is Risk Management Important for Intraday Trading?

Since intraday trading entails buying and selling an item on the same day, the price can move quickly. As a trader, you must make judgments fast and on the spot. Emotional decision-making can result from such a stressful setting, mainly if the market trends negatively. 

Trading decisions made impulsively or out of emotion might result in large losses. Furthermore, if the market behaves differently than anticipated, your transactions may still backfire even if you are an experienced trader with strong emotional self-control. 

For this reason alone, market analysts highly advise traders to minimise risk. A plan will enable you to manage your emotions, navigate volatile markets, minimise losses, and limit risk. 

Contrary to common belief, there isn't a single risk management strategy that works for everyone. You might not always be able to follow a plan that works for one trader. As a result, it is crucial to create your strategy based on elements such as your goals, market trends, and the type of your transaction. To safeguard their deals, most traders, in fact, frequently combine several different strategies. 

Intraday Risk Management Techniques

Four popular trading risk management strategies include position size, stop loss, trailing stop loss, and support and resistance levels. Let's examine each of these approaches in more detail. 

Position Sizing

The process of figuring out the appropriate capital or number of units for a trade is known as position sizing. You may successfully reduce risk in a trade by choosing the proper position size. Since intraday trading involves a lot of leverage, selecting the appropriate position size is essential to avoiding losses. For an intraday deal, market professionals advise allocating no more than 20% of your total available money.

Stop Loss 

One of the most popular methods traders use to limit risk is stop loss. A stop-loss transaction involves setting a limit order at a fixed price lower than your buy price. The stop-loss transaction is performed immediately to minimise losses if the asset goes against your expectations and reaches the predefined price level. A suitable stop loss would be, based on the volatility of the market and the asset you are trading, anything from 5% to 10% below your buy price. 

Trailing Stop Loss 

A trailing stop loss is a variation meant to safeguard your winnings. A trailing stop loss order is issued at a particular percentage or price below the current market price. The stop loss follows the asset as it moves in your desired direction. In the unlikely event that the asset changes course abruptly, the trailing stop loss would be activated, realising accrued profits and preventing more losses. 

Support and Resistance Levels

Finding support and resistance levels, or the points at which an asset refuses to fall or increase, is a key component of risk management in trading. Determining these levels with accuracy facilitates the setting of stop loss or trailing stop loss orders and the identification of possible intraday trading entry and exit locations. To predict when an asset will bounce off these levels, one can, for instance, place a buy order near support or a sell order near resistance.

Tips for Risk Management

These are five pointers to assist you in creating a risk management plan that works and fits the requirements of your company:

• Focus on Finances: Start by protecting your organisation's money. Prevent potential losses from theft, fraud, or bad investments by setting clear rules and checks for financial transactions.
• Seek Expert Advice: Help professionals outside your organisation handle complex legal, accounting, and investing issues. Their fresh perspective can improve your financial policies and procedures.
• Include Everyone: Ensure everyone in your organisation understands how to manage risks. Create a culture where every staff member knows how to deal with problems and follows established policies.
• Use Visuals for Clarity: Make risk reports easy to understand. Visual aids like graphs and summaries help people grasp risks better than just using spreadsheets or text.
• Adapt to Changes: Be ready for changes that affect your organisation. Have plans to identify and manage risks when there are shifts in the economy, staff, or donation patterns. Documented procedures can ease the impact of changes.

Conclusion
It is important to remember that risk cannot be eliminated; risk management techniques can only minimise it. Despite strong risk management strategies, losses might still occur, particularly in a turbulent market. As a result, it's critical to thoroughly evaluate the nature of the numerous risks involved in trading and develop a trading risk management plan specifically designed to lower those risks. You can explore different trading strategies from your trading app and select which one suits your trade.