3 Important Intraday Trading Formulas and Rules 1

3 Important Intraday Trading Formulas and Rules

There are 3 intraday trading formulas which are useful for intraday trading. Apart from these formulae, Intraday trading requires to follow certain rules, strict concentration,discipline, hold on your nerves and the last but not the least, the technical analysis to succeed.

Intraday Trading is an alluring idea for traders to make quick money in stock markets. After all,who would not be interested in making some quick bucks in a matter of minutes or hours.That is the reason of its popularity in a section of traders.

Intraday trading or daytrading, as the name is self-explanatory, is the process of taking long or short position in markets and squaring off (exiting)  that position before the close of the market on the same day.

Day traders take the advantage of the movement in the price of the stock or the index during the trading session.Movement can be small or significant.Trade can be for minutes or hours.

Intraday traders take position in large quantities of a stock.This is useful because a small movement in the stock provides big gains.Consequently,the risk is also equally big in the event of adverse movement.

Taking position in  large quantity of a stock and squaring off the position immediately after the stock takes a small move in the favourable direction,is called Scalping.

Scalpers take several trades during the day. At the end of the day,the profits are significant.Online share trading has made Intraday Trading easy for day traders .

What are The Intraday Trading Formulas?

Of course,there are some intraday trading formulae which  are popular among the intraday traders. These are Pivot Point Formula or Fraction Theory.But intraday trading is not all about using formulas.When you are there in the middle,it is a totally different ball game altogether.

We shall be discussing here the above said intraday trading formulas but the other things which are very important and need to be taken care of are –

Having a proper Mind-set and Psychology – Share Trading  for fun or hobby can be dangerous.Your approach should be very professional.You should be aware that you are risking your hard earned money. The risk starts the moment you enter the trade.Take trading as a business.

Control over the Emotions – Emotions like Greed and Fear are the biggest enemies of a trader.Markets don’t stand at a place.They keep on moving,up or down.So,don’t let the fear take you for ride if markets move in the opposite direction of what you were anticipating.

You should be aware of your exit point in such case.On the other hand if trade starts turning profitable,exit the trade at your target price level.Stick to Stop loss and Targets to avoid Emotions in trading.

Having a Plan – Having a proper trading plan is an important part of trading in stock markets.You should be clear of the entry level,target level and stop loss of the particular stock which you are trading in.These levels are determined on the basis of Technical Analysis and the intraday trading formulas.Intraday trading formula

You need to stick to your trading plan to be a successful trader (You may like to read How to be a Successful Trader).

Writing the plan on a paper is a good idea so that you stick to your Plan.  It also ensures that you don’t get swayed away by the market moves when you are in.Without any of these,it is going to be very tough.

Intraday Trading Formulae

Before we move on to the various intraday trading formulae useful for trading, stock picking for trading is equally important. You need to learn how to pick intraday trading stocks.

An other equally important hard fact is that more than 80% of the traders loose money in trading.It means that no formula is perfect,otherwise that figure would had been other way around.

But that does not mean that these formulae are useless. These are the most popular and commonly used formulae for day trading.

It is advisable to use the intraday trading formulae after testing by paper trading or virtual trading to see which formula is best for you.Personally,I prefer Pivot Points as it gives best results when applied after identifying the trend in a stock.

Pivot Point Theory

Taking previous day’s trading prices of a stock,we can calculate the support and resistance levels for that stock for the next day.

Support and Resistance terms are self explanatory.A stock which is moving higher,may stop at resistance level and come back.Similarly,a stock moving lower,may stop at support level and reverse its move.After crossing first support or resistance level,stock is expected to move to next support or resistance level.

Coming to the Pivot Point Formula,we select a stock for Intraday Trading.For that stock,we need its previous day trading data- Intraday high price it touched ( H), intraday low price it touched ( L) and the previous day closing price ( C) for that stock.

         Add theses three values- H+L+C=X.

         Divide the total value by 3 (P) = X/3.

         Multiply it by 2 :- X/3*2=Y

This value P is called the Pivot Point.Stock sustaining above Pivot Point is likely to move higher towards first resistance level and above that towards second resistance level.If stock continues to trade below the Pivot Point,it is likely to drift lower towards first support level and after that towards second support level.

Let’s calculate resistance and support levels;

First resistance level ( R1)  = It is the difference between the {Pivot Point X 2} or Y and the Intraday Low price.

         R1= Y-L

         R2=P+( H-L)

First support level ( S1) = it is the difference between Y and the Intraday High price.

         S1= Y-H

         S2= P-(H-L).

Fraction Theory

This theory is also based on previous day price movements of a stock.

Add up high (H),low(L) and closing (C) price of previous day of the stock and multiply it by 0.67 (ratio of 2:3 as in pivot theory and it is constant)

         (H+L+C)* 0.67=Y

         Resistance (R1)= Y-L

         Support (S1)= Y-H

     Possible Buy (P.B.)= Y-C

Above possible buy (P.B.),buy the stock for resistance levels.

2652 Theory of intraday Trading

2652 Theory is based on previous day and present day High and Low prices of a stock.This theory has its own disadvantage that it makes you trade for gain of 0.5% while keeping your stop loss 1% lower.Your risk is double of your profit and using such strategy in day trading doesn’t make sense where probability of going wrong remains high.

You should also use technical analysis based on short-term charts for stock to know the trend and other indicators of technical analysis.Buy stock which show uptrend while look to short which are down trending.

The Intraday Chart with 15 Minute interval remains best for effective Intraday trade,though you may use any interval like 1 Minute,5 Minute or 10 Minute.

Prefer to use trend lines on Intraday Charts to take buy or sell call on your trade.5 Minute Bar Chart can be a good method to use trend lines for Intraday Trading.

Only formulae do not work to survive in Intraday Trading.There are certain strict rules which you need to follow.

Intraday Trading Rules to keep your Risk to the Minimum

I again would like to emphasize that Intraday Trading is very risky for your capital. Positional trading can be more rewarding than intraday trading.Profits can be huge with positional trading with minimum risk. I am telling this from my own experience.

Traders who want to go for day trading, should strictly follow the below rules.

1. Use surplus money – Trading should be done only with the spare money,the money you don’t need and you can afford to loose.Trading,although very profitable,is associated with substantial risk.

2. Do proper research – Before taking trade,proper research should be done about the stock or the index ,using charts based technical analysis.It helps in determining important levels of the stock,strength and trend of the stock.

3. Use of Stop loss – This is very important part of any kind of trading.Most of the traders don’t use it,knowingly or unknowingly and end up taking huge losses.Stop loss helps cutting short the losses and keeping emotions out of trading thereby protecting your capital.

Remember,capital protection is more important than earning profits.Profit earning opportunities keep on arising in the markets which you can use if you keep your capital protected.

4. Don’t overtrade – Overtrading is suicidal.More trades become difficult to manage.So trade only that quantity you are comfortable with.Keep number of trades limited to 2-3.If one trade gave you sufficient profit,better close the system and do some other work or relax.Choose your trades on the basis of Risk Reward Ratio.

intraday trading

5. Be disciplined – This is the major quality of the successful traders.Avoiding overtrading,not fighting against the trend and cutting short losses and keeping fear and greed emotions out of the trading are some important steps.

6. Follow the Trend – To have a higher success rate in Intraday Trading,always remember ‘Trend is your Friend’.So,always follow the trend and trade in that direction only.In up trending markets,select stocks which are strong on charts and have long positions.In down trending markets,select the weaker stocks and short them.

Never trade against the trend.The advantage of trading with the trend is that even if you take a wrong call,you will not suffer big losses.

7. Liquidity – Always try to trade in highly liquid shares.Liquidity is the volume of shares traded.High liquidity is good for day trading stocks.In liquid stocks,it is easy to enter and exit the trade and you enter or exit the trade near the last traded price.

8. Profit takingExit Strategy is really important.Take your profits and get out of the market when your target are achieved.Letting the profits run beyond targets leads to greed which is dangerous for trading.You never know when the market will turn around and throw you in losses after eating all the profit.

Cutting losses is an important part of successful trading.Exit your position if market is not going the way you anticipated.Don’t be stubborn and let the market do what it wants to do.

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