Risk Management in Intraday Trading

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, at the end of the day, all open positions are closed. This lets you apply leverage and lowers your trading expenses, such as brokerage charges. Leverage allows you to manage huge holdings with little margin deposits—just a small portion of the trade value. 

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

What is Risk Management in Trading?

The risk management refers to a method or a collection of approaches that help you control the various types of risks that come with trading. If you have strong risk management strategies in place, you can minimise trading losses that result from the market going against your expectations. 

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Table of Content

  1. What is Risk Management in Trading?
  2. Intraday Risk Management Tools and Strategies
  3. Why is Risk Management Important for Intraday Trading?
  4. Intraday Risk Management Techniques
  5. Tips for Risk Management

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 example from above once more, 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 by 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 for the moment that the stock price is at 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: The price changes of shares are graphically represented by candlesticks. By analysing the candlestick patterns, traders may forecast both the stock's short-term movement and its future course. When making intraday trading decisions, these patterns serve as a point of reference.

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. You will need to make judgments fast and on the spot as a trader. Emotional decision-making can result from such a stressful setting, particularly if the market is trending negatively. 

Trading decisions made impulsively or out of emotion might result in large losses. Furthermore, if the market behaves differently than you had 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 their risk. Having a plan in place will enable you to manage your emotions, navigate volatile markets, minimize 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 of the most 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 appropriate position size. Since intraday trading involves a lot of leverage, choosing 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 used by traders to limit risk is stop loss. Setting a limit order at a fixed price lower than your buy price is known as a stop-loss transaction. The stop-loss transaction will be performed immediately to minimise your 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 stop loss variation that is meant to safeguard your winnings. At a particular percentage or price below the current market price, a trailing stop loss order is issued. The stop loss follows the asset as it moves in the direction you want. Now, in the unlikely event that the asset decides to abruptly change course, 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, as well as the identification of possible intraday trading entry and exit locations. To assist in predicting 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: Get help from professionals outside your organisation to 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.

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 at trade and develop a trading risk management plan that is specifically designed to lower those risks. You can explore different trading strategies from your trading app & select which one suits your trade.  

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FAQs on Risk Management in Intraday Trading

Setting a stop loss is crucial in intraday trading as it helps limit potential losses. It's a predefined price level at which a trader exits a position to avoid further losses if the market moves against their expectations.

Determining position sizes involves considering factors like risk tolerance, available capital, and the asset's volatility. Generally, experts recommend allocating no more than 20% of total capital for an intraday trade.

Support and resistance levels indicate price points where an asset tends to stop falling or rising. Identifying these levels assists in placing stop loss or trailing stop loss orders and helps in identifying entry and exit points for intraday trades.

While a regular stop loss is a fixed price below the buying price, a trailing stop loss adjusts upwards as the asset's price increases. It's designed to protect profits and limit potential losses by following the asset's positive momentum.

Intraday trading involves quick decisions in a fast-paced market. Effective risk management helps traders control emotions, navigate volatile markets, and limit losses, preventing impulsive decisions that might lead to significant losses.