How can I use intraday trading more effectively to earn higher returns in the stock markets?

There is no magic wand and intraday trading is complicated business. But, here is how you can go about it. You can actually punch above your weight with intraday trading.

Intraday trading constitutes a large chunk of daily trading on the NSE and the BSE. Intraday trading involves initiating a position and closing out the position on the same day. Since Indian markets operate on a rolling settlement basis, if you cover your position on the same day, then it does not result in delivery. The profit or loss is either credited or debited to your trading account with the broker.

The reason intraday trading is popular is that it allows you leverage. Let us understand this little better. If you have Rs.20,000 available with you then you can buy 100 shares of Hindalco at the CMP of Rs.200. But, if you want to close this position intraday, then the broker will allow you to take a larger position. For example, if your broker allows you 5X leverage then you can buy 500 shares of Hindalco by putting a margin of Rs.20,000. You have effectively leveraged yourself by 5 times.

Now there are two scenarios that are possible. In the first case, let us assume that the stock price of Hindalco moves up from Rs.200 to Rs.204. You sell the 500 shares of Hindalco and pocket the profit of Rs.2000 (500x4). This profit gets added to your margin account and your end-of-day margin will stand at Rs.22,000. On the contrary, if the stock moves down to Rs.197, then you will trigger a loss of Rs.3 and close the position. The loss of Rs.1500 (500x3) will be debited to your trading account and your EOD margin will be Rs.18,500.

If you want to be successful in intraday trading, here are some basic essentials

· Never enter an intraday position without a stop loss and a profit target. Both these must be set in the trading terminal in advance.

· Intraday trading gives an opportunity to short sell the stock and cover it back when the price falls. It allows you to play the market both ways.

· When you are selling short intraday, remember to close the position before the close of trading. If you have a sold as stock and you cannot give delivery, then the shares will go to auction and you will have to bear the loss, which can be as high as 20%.

· Most brokers have in-built position termination facility in their trading engines and these position closures are triggered automatically around 15 minutes before the close of trading .

Remember, intraday trading can multiply profits but it can also multiply losses. Like any leveraged product, intraday trading plays both ways. Hence as a trader you need to be extremely careful while trading intraday.