What is intraday trading formula and rules?
Intraday trading or day trading for short has a certain appeal for traders as it allows them to quickly build up their capital. It is not surprising then that intraday trading therefore is very popular among traders across the different financial markets.
Starting with day trading is simple. You need a trading account which could be with a stock broker or a forex brokerage account. Mastering intraday trading and maintaining the gains consistently is however a challenge. In this article let's find out what is day trading and some best practices on how you can day trade stocks or currencies.
Intraday trading explained for beginners
Before we get into the details of intraday trading formula and the results, we need to firstly define what intraday trading is all about.
Also known as day trading, the name is obvious from the fact that traders buy or sell securities during the span of regular business hours. This is nothing but opening and closing the positions during a single day. No positions are left overnight.
Day traders basically take advantage of the volatility in the price of the stock or the index that they trade during a trading session.
On some days, volatility can be low, but on other days, volatility can be high giving traders a lot of opportunities.
Intraday trading can be done in a matter of a few minutes to a few hours but does not expand beyond a day.
Day traders make money basically by having a large trading capital. This allows them to use bigger contracts which in turn can help them to maximize their profits.
On the flipside, due to the volatility in the markets, the risks are also equally big in the event of any adverse movements in the markets.
Therefore, day trading is indeed risky as you can easily lose money just the same way you make money. Day traders therefore employ the use of a trading technique called scalping.
With scalping, traders are left open for a short period of time. Profits are generated based on small price movements in the security or the asset that is being traded.
Traders make money with scalping by having large contracts. Thus, the tick size of the security is more valuable and allows day traders to make quick profits. To be successful with scalping day traders need to ensure that they constantly nurture their trades. This means that most of the times, day traders keep a close track on their open positions and manage their trades actively.
Intraday trading formulae
There are many intraday trading formulae that one can use. Some of the most popular intraday trading formulae are as follows:
- Pivot point formula based trading strategy
- Fraction theory based trading strategy
However, intraday trading formulae are not always at the core because trading to make profits requires are lot more than just following one of the intraday trading formulae that is outlined.
Firstly, you need to have a good mindset if you want to be successful with intraday trading. This means that you need to be comfortable with taking losses on your account. Losses in trading are part and parcel of the game of trading.
Therefore, traders need to have the right mindset and leave their emotions aside. In short, to be a successful intraday trader, you need to be grounded.
Fear and greed are often cited as the two most common emotions that day traders need to deal with. This is the case because emotions are of course a part of being human. With trading however, such emotions need to be put in check. Being aware of where you exit in a trade and knowing that your analysis was wrong are just some of the thing’s day traders need to constantly remind themselves.
The best way to deal with emotions is therefore to have a trading plan.
A trading plan is essential whether you are day trading or swing trading.
A good trading plan gives your clear entry, target and stop loss levels.
Depending on the trading plan, you can also look into how to lock in the profits and knowing when to add or remove your trading positions.
A trading plan is therefore quite different from a trading strategy. A trading strategy merely deals with what levels to trade at and when to exit. A trading plan will tell you whether you should be adding to your positions on winning traders or whether you should trail your profits.
Pivot point theory
The pivot point theory is an intraday trading formula that makes use of a mathematical approach to trading. Pivot points are levels that take the previous day's trading prices of a security and form the pivot levels for the current day.
Support and resistance levels are easy to understand. A security that is moving higher is most likely to stall near a resistance level and revert while a security that is moving lower is expected to stall near the support level.
The pivot point formula that is used for day trading is derived from the high, low and the previous day's closing price.
The pivot point is based on the average price based on the high, low and close. From this pivot point, the resistance levels are calculated as follows:
Resistance 1 = (H+L+C/3) x 2 - L
Resistance 2 = P + (H+L)
Support 1 = (H+L+C/3) x 2 -H
Support 2 = P - (H-L)
The chart below shows a simple pivot point trading formula on a stock chart.
Based on the pivot point formula, intraday traders basically focus on price reversal near one of the support and the resistance levels. Since the levels are tightly packed together, traders can place buy and sell orders when there is strong momentum in the market.
This short term scalping allows the intraday traders to make profits which are then magnified based on the trading capital that is used.
The fraction theory is also similar to the pivot point intraday formula. With the fraction theory, similar support levels and potential buy areas are calculated. The formula for calculating the fraction theory are as follows:
Sum the previous day's High, Low and Close of the security and multiply this with 0.67. This is a constant that is derived from a ratio of 2:3 in pivot theory.
We call this final result as Y.
The Resistance 1 is calculated as Y - Low from previous day, while Support 1 is formed by calculating Y - High.
The possible buy area is Y - C.
Intraday traders buyers buy the security at the possible buy area targeting the resistance levels.
2652 Theory Intraday trading
This intraday trading strategy is based on the previous day and the current day's high and low prices of the stock. The theory however comes with a major drawback because of its risk and reward set up. The gains are usually just 0.5% while the losses are 1%.
This unlike regular risk reward ratio of 1:2, with the 2652 intraday trading, the risk reward is 2:1. This means that you are more likely to lose twice as much as you are likely to make.
This trading strategy is used by intraday traders based on the short term charts. It is used to know the trend based on other indicators.
The rules are to buy a security which are in an uptrend and to short the security which are in a downtrend.
Day traders can make use of the trend lines on the intraday charts and make buy and sell calls on the trades. Usually, a 5-minute chart timeframe is a good method to use for this strategy.
To be successful in intraday trading it is not just the formula that one needs to focus on but also the intraday trading rules.
How can I get success in intraday trading?
Before we get into more details it is worth mentioning that intraday trading is very risk for trading. While any form of trading comes with risks, the intraday trading is more susceptible to risks due to the volatility in the markets.
Profits can be made with positional trading using risk management.
The following day trading rules need to be focused upon if you want to be successful in intraday trading.
Trade with money that you can afford to lose
Day trading is risky and therefore you need to day trade only with money that you can afford to lose. Day trading with money which you need for your regular expenses is highly not recommended. Day trading can leave with losses more than what you invested.
Do your homework
When it comes to the financial markets, it is always advisable that you do your research. This means being adept at using technical analysis methods and to determine the important levels in the price of security.
These days there are many popular trading platforms that can allow you to conduct in depth technical analysis, which you can take advantage of.
Stop losses are pending orders that tell your broker when to execute the stop order in case the trade runs into a loss. A stop loss order is therefore important and will help you from taking big losses. Every trade should ideally have a stop loss level regardless of how confident you are about the markets.
Capital protection is one of the most important aspects when it comes to day trading and stop loss is one way you can prevent your stops.
Do not overtrade
Overtrading is when you trade more than required. If you have reached your daily stop loss or take profit levels, then it is best to be done with trading for the day.
Overtrading is one of the biggest reasons why traders lose money. Overtrading can happen when you let your emotions rule your trading. Overtrading also does not mean trading too many times but also keeping a limit on the number of open positions that you manage at any point in time.
Having too many open positions at the same time can create confusion and will therefore result in you not being able to give your full attention and focus to your trade.
Sometimes, day traders will find many trading opportunities which can seem appealing. This can lead to traders losing focus of their trading plans and eventually allowing one’s emotions to dictate the trades.
Be disciplined in your approach
Being disciplined in your trading can reap you rewards. By being disciplined, traders will be able to know when to trade and when not to. Similarly, discipline in trading also means keeping your emotions at bay.
This will help you avoid you from overtrading and not fighting against the trend. A disciplined trader will also know when to trade and when to stay out of the markets.
Follow the trend and stay safe
If you are new to trading, then following the trend is one of the safe ways you can trend. However, the trick is in identifying the right trend and trading in the direction of the trend. There is a common saying in day trading that the trend is your friend.
While there are intraday trading strategies that are counter trend and can seem more profitable, if you are new to trading, then following the trend is the safest as you will trade in the direction of the trend.
Keep an eye on liquidity
It is always good to trade securities that are liquid. A security that is liquid allows you to easily transact in the markets with relative ease. A security that is liquid also brings tighter spread, which is the difference between the bid and ask prices.
The costs of entering and exiting liquid markets are therefore lower.
Take profits regularly
Develop the habit to take profits regularly. The markets have a tendency to give profits and reclaim them back. Using smart use of stop loss levels such as trailing stops is a good way to lock in whatever small profits that the markets allow you to.