The Intraday Trading Formulae and Rules That Beginners Need to Know

The intraday trading formulae are useful for finding your target price and stop loss in intraday trading. Apart from these formulae, intraday trading requires accurate stock selection, following certain intraday trading 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 of stock trading 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. This is the reason of popularity of intraday trading in a section of traders and especially, the beginners.

Intraday trading involves buying and selling of shares in a single trading day. It is a highly profitable trading strategy if done with due diligence, discipline, research and professional approach.

Intraday trading, although fascinating, is actually very risky!

You must know that you are trading against the most shrewd traders and also a network of computerized trading systems called as algorithmic trading. The later involves order placements by programmed computers. You have to make yourself smart enough to steal money from them.

There is a lot of noise and price volatility in stock prices during the trading sessions. The probability of triggering the stop loss is much higher in day trading. It can lead to frequent trading losses.

It is very important to have technically valid target price and stop loss price before you enter a trade. You can not place a random target and stop loss price for a trade and expect to succeed in intraday trading.

We will be talking about the appropriate target and stop loss prices through some important formulae in intraday trading.

You must remember that the intraday trading formulae are no shortcut to successful intraday trading. Infact, no formulae or strategy is perfect to make money consistently in day trading. Otherwise, everyone would have been successful in trading. But even then, they provide you some light in the darkness.

It requires a lot of research in the form of chart reading, practice, time, risk management, money management and control over the human emotions before you succeed in intraday trading. It is never a get rich quick ticket.

Let us know about the intraday trading basics and the various intraday trading formulae!

What Is Day Trading?

Intraday trading or day trading is a popular investing strategy for making money in the stock market. It involves buying and selling stocks or other securities within the same day, taking advantage of short-term price moves.

Day traders aim to capitalize on volatility and profit from small, rapid price changes throughout the day by taking long or short positions in stocks.

Long position is when you buy stocks in a hope to sell them later at a higher price. Short position is when you borrow stocks from your broker to sell them at certain price in a hope to buy them back and return back to the broker.

The difference between selling and buying back is your profit or loss, depending upon the selling and buying price. If the trade is carried to next trading day, it is called as delivery trading.

Day traders take the advantage of the movement in the price of the stock or the index during the trading day. This movement can be small or significant. Trade can last for seconds, 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.

On the opposite side, the risk is also equally big in the event of adverse stock price movement. You can trade in large quantities of stock with limited cash under margin trading.

Intraday trading is not limited to stocks only, but you can also trade futures and options in intraday. You can also trade in futures and options in intraday and take the advantage of cash leverage provided by these trading tools.

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. Scalping trades usually last for few seconds only. At the end of the day, the profits with scalping are significant when add up. Online share trading has made intraday trading easy for day traders.

Intraday trading is very risky and tiring job. It requires you to keep watching the screen whole day, waiting for the right opportunity or a trading signal to emerge.

Moreover, the probability of a winning trade in any trade is only 50%. Rest is your skill of money management and mathematics.

You should carefully weigh the pros and cons of intraday trading for you. If you are in some other job and want to do intraday trading for additional source of income, then I would suggest you to reconsider the decision for day trading.

It is not possible to carry on intraday trading along with your regular job. Trading requires total professional approach, concentration and quick trade managements.

If you can give that much time, then only you should go for intraday trading. Otherwise, you can make money by delivery trading like swing trading, positional trading where the trade extends up to days, weeks or months. They can also be equally rewarding to you.

Stock Trading Strategies

A strategy is a well thought out plan. A plan to guide you when to enter and exit the trade. The stock trading strategies give you an appropriate entry price, target price and stop loss price. It should also cover the trading risk with proper risk management.

You should create your own intraday trading strategies. Test these intraday strategies on historical data through back testing or by paper trading through virtual trading account.

The strategy which gives you the best results on paper trading should be taken up for trading with real money. Stick to this strategy even if it does not work for some time.

Switching between different strategies frequently is not advisable if your strategy gives you few losing trades after winning trades.

Losing trades are the part of trading. What makes your trading profitable is the bigger profits and small losses. Your intraday trading strategy should be such that it gives you larger profits and small losses.

The important factors which you need to build an intraday strategy are :

Having A Proper Mindset 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. You have to keep telling yourself that that you are in the stock market only to make money and not just for trading.

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.

Have A Trading Plan

Having a proper trading plan is an important part of stock trading strategies. You should be clear of your entry level, target level and stop loss of the particular stock which you are trading in.

Target price and stop loss price is nothing but support and resistance levels in stock prices. These levels are determined on the basis of technical analysis and the intraday trading formulas.

Technical analysis guides you how to find a stock’s support and resistance level.

A support is the level up to which stock price can fall before start rising. A resistance is the level up to which stock price can rise before falling down. You can draw trend lines, Fibonacci retracement lines or horizontal lines on the technical charts to find a good support or resistance level.

You need to stick to your trading plan to be a successful trader. Writing the plan on a paper is a good idea so that you stick to your trading plan. Having a written trading plan also ensures that you don’t get swayed away by the market moves when you are in.

Cut Losses Short

The mantra to make money in any kind of stock trading; be it intraday trading, swing trading or positional trading is to keep your losses short and let the profits run bigger.

Losses are part of trading, and you cannot totally avoid them. But having profits bigger than the losses will ensure that finally the net result is profits.

You can do that with simple mathematics.

It is important to know that stock trading is all about mathematics.

It is popular as 1% rule among the successful stock market traders. You should make a rule that you would never risk more than 1% of your total trading capital in any trade, even if you are 100% sure of a trade going in your favor.

1% rule helps you to keep your exposure to stock market limited.

Intraday Trading Formulae

Before we move on to the various intraday trading formulae useful for trading, stock selection for intraday trading is equally important.

It is worth learning how to pick intraday trading stocks. The stocks with daily high trading volumes (high liquidity) and daily price variation (volatility) of at least 1% are the best intraday stocks.

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

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.

Opening Range Breakout Theory

Opening range breakout (ORB) is based on the trading range created by a stock in the first few minutes of opening. The strategy assumes that the breakout in any direction out of the opening range determines the further course for the stock price for the remaining period of the trading session.

This strategy is based on the live trading charts. You would need a good day trading platform which provides you intraday charts live.

In this strategy, the high and low price a stock makes in first 30 minutes is marked on the chart. The chart used for intraday trading is 5 minute chart. The two most popular moving averages : 5 period exponential moving average (EMA) and 20 period exponential moving average is drawn.

After 30 minutes, if the stock breaks above the opening range, the stock may move further higher. To confirm the trade, the 5 EMA should cross above the 20 EMA and should be above the upper range level. The volume should be high at this breakout to avoid false signal.

Ride the trade till the 5 EMA is above the 20 EMA. Stop loss for the trade is close below 20 EMA. 50% profits can be booked on close below 5 EMA.

Similarly, the strategy can be applied for the short selling or short trade. It is on breakdown below the low of the range. The 5 EMA should cross below the 20 EMA on high volumes and 5 EMA should be below the level of the range low.

Close above 5 EMA is the point of booking 50% profits and close above 20 EMA is the level of exiting the short trade.

Pivot Point Theory

Personally, I prefer pivot points as it gives best results when applied after identifying the trend in a stock.

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 andresistance 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.

With pivot point formula, you can take long trade as well as short selling trade. Long trade is taken above pivot point or support levels with targets which are the resistance points of pivot point formula. Support levels are your stop losses.

For short selling, you can short a stock below the level of pivot point or resistance levels for target of support levels. Here, resistance levels are your stop loss levels.

Pivot Point Calculation

For pivot point calculation, we need previous day trading data of the stock – 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 x 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

The second Resistance level (R2) is calculated as below :

R2 = P + (H – L)

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

S1 = Y – H

The second Support level (S2) is calculated as below :

S2 = P – (H – L).

You can combine pivot point formula to technical analysis indicators to make one of the best intraday trading strategies.

Most popular and reliable indicator is stochastics oscillator. Look for crossovers of slow stochastics on daily technical charts.

If the stochastics gives you buy signal with a positive crossover near or below 30, you can initiate a buy trade above the pivot point or above first or second support level.

Similarly, a short selling can be done when there is a sell signal on slow stochastics crossover. It is more effective when the crossover is at or above 80 values. With that signal, short selling can be done below the pivot point or below first or second resistance level.

You can also apply Relative Strength Index (RSI) or MACD ( Moving Average Convergence Divergence) indicator.

In this way, you can evolve a more profitable intraday trading strategy.

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) x 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.

Intraday Trading Rules

The day trading rules are as important as the intraday trading formula. These rules keep the most successful day traders ahead of their peers.

The temptation for trading can be high especially in the beginners, so it is important that you strictly follow the rules for day trading and avoid trading when you have no plan ready to trade.

Below are the simple rules to day trading you should strictly follow to succeed in intraday trading :-

1. Use Surplus Cash Only

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.

There are so many popular online stock trading software available. They are capable of finding the trading opportunities for you. A trading signal is generated as soon as an event happens on technical charts.

You can do research by yourself by studying the technical charts at various websites. One such hugely popular website is Tradingview where you can find advanced technical charts for any stock of any stock exchange in the world for free as well as on subscription.

The stock sceener is also a useful tool if you can not find stocks for trading by yourself.

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. Never 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.

5. Be Disciplined

This is the major quality of the most successful day traders.

Avoiding over trading, 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’

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 Taking

Exit Strategy is really important. Take your profits and get out of the market when your target is achieved. Money is made in markets on exiting only.

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.

9. Make A Trading Journal

A trading journal is must for every trader. It is nothing but a trading dairy.

It is used to record your trading activity in written form. Having a trading journal ensures that you know what you are doing and use it to review your performance in stock trading.

Trading journal consists of different aspects of each trade – the date of trade, the amount invested or the number of shares traded, the outcome of the trade and the specific notes about each trade.

This data helps you know why you took any particular trade and any mistake or positive you did in that trade.