Intraday Trading Rules and Formulas

Intraday Trading Formulas and Rules

Intraday trading formulas provide valuable insight into determining your target price and stop loss in intraday trading. In addition to these formulas, successful intraday trading requires adherence to specific day trading rules, unwavering focus, discipline, composure, and, most importantly, technical analysis.

Intraday Trading 

Intraday trading presents an appealing opportunity for traders to swiftly capitalize on stock market movements. The possibility of earning quick profits within minutes or hours makes intraday trading extremely popular among a segment of traders.Getting started with day trading is relatively straightforward, requiring only a stock trading account. However, mastering intraday trading is a challenging endeavor.

Let's explore the foundations of intraday trading and identify the optimal approach for day trading stocks!

What Is Day Trading (Intraday Trading)?

Let's dive into the world of Intraday Trading! Intraday trading, or day trading, is all about making swift moves in the stock market, where you buy or sell stocks and close your positions before the day ends. Day traders thrive on the fluctuations in stock prices that occur during trading hours, whether they are small or significant.

What is Intraday Trading 

Trades can last for minutes or stretch out over hours, but the key is to capitalize on these movements. Intraday traders often deal in large volumes of stock, leveraging small price shifts for substantial gains. It's a high-risk, high-reward game that allows you to trade large quantities of stock even with limited cash, thanks to margin trading.

You have the option to engage in Futures and Options trading for intraday transactions, capitalizing on the cash leverage provided by these financial instruments. Scalping involves taking a substantial position in a stock and swiftly exiting the position once the stock exhibits a small favorable movement.

Day traders who engage in scalping execute multiple trades throughout the day and can realize significant profits by day's end. Thanks to online share trading, Intraday Trading has become more accessible for day traders. However, it’s crucial to acknowledge that Intraday trading is inherently risky and demanding, necessitating continual screen monitoring to seize the right opportunities.

Additionally, the likelihood of a successful trade in intraday trading is only 50%. Therefore, it’s essential to carefully evaluate the pros and cons of intraday trading before venturing into it. If you are currently employed and are considering intraday trading as an additional source of income, it’s advisable to thoroughly reconsider your decision.

Intraday trading requires a high level of professional dedication, focus, and quick decision-making. It may only be feasible to manage intraday trading alongside a regular job if you can commit significant time and attention to it. If that's not possible, you might consider alternative trading strategies like swing trading or positional trading, which involve trades held for days, weeks, or months.

Stock Trading Strategies 

Certainly! Intraday trading involves popular formulae such as the Pivot Point Formula or Fraction Theory which are widely used by intraday traders. However, successful intraday trading encompasses more than just formula application. It requires a deep understanding of the unique dynamics at play in the stock market. In this discussion, we will explore various stock trading strategies that are beneficial for day trading. Key considerations that need to be addressed include: [list the things that are very important and need to be taken care of].

Having A Proper Mindset and Psychology for Day Trading ( Intraday Trading )

Share trading as a recreational activity or hobby can carry significant risks. It's crucial to approach it with a high level of professionalism and awareness of the potential to risk hard-earned money. The moment you enter a trade, the risk begins. It's essential to treat trading as a serious business endeavor.

Control Over The Emotions 

Emotions like Greed and Fear are the biggest enemies of a trader. When trading, markets are constantly in motion, moving up or down. It's important not to let fear take over if the markets move in the opposite direction of your expectations. Always be aware of your exit point in such cases. Conversely, if a trade starts becoming profitable, exit the trade at your target price level. It's crucial to stick to stop loss and targets to avoid being influenced by emotions when trading.

Having A Trading Plan 

It is crucial to have a well-defined trading plan when engaging in stock trading. Your trading plan should clearly outline your entry-level, target level, and stop loss for the specific stock you are trading. These levels are determined based on Technical Analysis and intraday trading formulas. Adhering to your trading plan is essential for achieving success as a trader.

Consider writing down your plan on paper to help ensure that you stick to it. A written trading plan also serves as a safeguard against being swayed by market movements while you are trading. Without a solid trading plan, navigating the stock market can be extremely challenging.

Intraday Trading Formulas

Before we delve into the different intraday trading formulas for trading, it's essential to emphasize the significance of stock picking for trading. Understanding how to pick intraday trading stocks is valuable. An important fact to note is that over 80% of traders lose money in trading. This underscores the reality that no formula is foolproof; otherwise, the statistics would be reversed.

However, it's important to note that these formulae still hold value. They remain widely popular and are frequently utilized for intraday trading. It's recommended to test these intraday trading formulae through paper or virtual trading to identify which one works best for you.

Opening Range Breakout Theory 

The opening range breakout (ORB) strategy is widely used in day trading. It revolves around the price range that a stock establishes in the initial moments of the trading day. The core idea is that a breakout in any direction from this opening range sets the tone for the stock's price movement throughout the rest of the trading session. Typically, the first 30 minutes of market opening are crucial for determining a stock's opening range.

This period witnesses high-volume trades and significant volatility. Following this period, usually within the first hour, the stock strives to establish a trend for the remainder of the day's trading activities. When implementing this strategy, traders mark the high and low prices achieved by the stock in the first 30 minutes.

A 5-minute chart is commonly used for intraday trading, and it is complemented by two popular moving averages: the 5-period Exponential Moving Average (EMA) and the 20-period Exponential Moving Average (EMA).

After the initial 30 minutes, if the stock breaks above the opening range, it may experience further upward movement. To confirm a potential trade, a specific moving average, represented as "[5 EMA]," should cross above another moving average, represented as "[20 EMA]," while staying above the upper range level. Additionally, high trading volume at this breakout is essential to avoid false signals.

To maximize gains, consider holding onto the trade until 5 EMA surpasses 20 EMA. In case of a trade downturn, set your stop loss just below 20 EMA. Once 5 EMA closes below 20 EMA, it's advisable to lock in 50% of your profits. This same approach can be adopted for short selling or trading. Look for a breakdown below the lower end of the range. 5 EMA should dip below 20 EMA with significant trading volume, and it should remain below the range's lower level. When 5 EMA closes above, it's a cue to secure 50% of profits, while a closure above 20 EMA signals the exit point for the short trade.

It's important to align your trades with the overall market trend.

Pivot Point Theory

I find that Pivot Points are my preferred method as they tend to yield the best results once the stock's trend has been identified. By looking at the previous day's trading prices of a stock, we can calculate the support and resistance levels for that stock for the following day.

Support and Resistance are fairly self-explanatory terms. For instance, a stock that is trending upward may encounter resistance and reverse its direction. Conversely, a stock that is trending downward may find support and begin to retrace its movement. Once a stock crosses its initial support or resistance level, it is anticipated to move to the subsequent support or resistance level.

The Pivot Point Theory is a valuable tool for predicting intraday stock movement for the next trading day. This theory allows traders to easily calculate stop loss and target levels to enhance trading profitability. By utilizing this day trading formula, traders can access 3 Resistance Levels and 3 Support Levels.

The Resistance Levels serve as the Target Prices, while the Support Levels act as the Stop Loss Levels for day trading. This versatile Pivot Point Formula enables traders to execute both long and short-selling trades. In long trades, positions are initiated above the Pivot Point or support levels with targets set at the resistance points of the Pivot Point Formula.

The Support levels function as stop losses. For short selling, traders can take short positions on a stock below the Pivot Point or resistance levels, targeting the support levels. Here, the resistance levels play the role of stop loss levels.

The pivot point calculator is given on my website, you can use it for free

You can enhance your intraday trading strategies by combining the Pivot Point Formula with various technical analysis indicators. One of the most popular and reliable indicators is the stochastic oscillator.

To identify potential trading opportunities, look for crossovers of the slow stochastic on daily technical charts. When the stochastic oscillator provides a buy signal with a positive crossover near or below 30, consider initiating a buy trade above the pivot point or above the first or second support level.

Conversely, for short selling, look for a sell signal on the slow stochastic crossover. This strategy is particularly effective when the crossover occurs at or above an 80 value. When this signal is present, short selling can be executed below the pivot point or below the first or second resistance level.

You can also incorporate other indicators such as the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD) to further refine your intraday trading strategy. By integrating these technical tools, you can develop a more profitable approach to intraday trading.

Technical Charts in Intraday Trading (Day Trading)

To understand stock trends and key technical indicators, utilize short-term charts for technical analysis. Favor stocks exhibiting an uptrend and consider shorting those that are trending downward. This approach is akin to the Opening Range Breakout Strategy mentioned earlier but with a focus on the Opening Range Breakout (ORB).

Exponential moving averages (EMAs) for 5 and 20 time periods are particularly valuable when used with a 5-minute intraday candlestick chart. The crossover between the 5 and 20 EMA EMAs is especially pertinent for short-term trading. A buy signal for day trading can be identified when the 5-period EMA crosses above the 20-period EMA, but it's essential to confirm that the price is being supported by the 20-period EMA line before executing the trade. On the other hand, for short selling, look for the 5-period EMA to cross below the 20-period EMA line. Once again, ensure that prices are meeting resistance at the 20-period EMA line before initiating the short trade.

To avoid false signals during trading crossovers, ensure that the volume is higher than average at that time. For your long trades, consider using the lowest point of the previous green candle which found support at 20 EMA as the stoploss. Similarly, for short trades, place the stop loss just above the highest point of the previous red candle that found support at 20 EMA.

It's important to take profits when you've made reasonable gains and exit the market promptly. Alternatively, you can let the profits run until the prices break the 5 EMA, at which point consider booking 50% of the profits. When 20 EMA is breached, close the position. Before executing actual trades, it's advisable to practice this method through virtual or paper trading. Stock trading is an art, and no indicator is foolproof. Indicators serve as guides, but it's essential to develop the skills to make money in markets through hard work, practice, and patience.

If you prefer using trend lines on intraday charts to make trading decisions, the 5-Minute Bar Chart can be a useful option for Intraday Trading. Remember that surviving in Intraday Trading requires more than just following formulas. Adhering to strict day trading rules is essential for success.

Intraday Trading Rules

Intraday trading poses high risks to your capital, and it's important to highlight this for anyone considering this approach. Based on personal experience, I've found positional trading to be more rewarding compared to intraday trading. The potential profits can be substantial while keeping the risks at a minimum. For traders considering day trading, it's crucial to strictly adhere to the rules of intraday trading, as they are just as critical as the Intraday Trading Formula and contribute to the success of many day traders.

Use Surplus Cash Only

Trading should only be conducted using discretionary funds – money that is not essential and can be comfortably risked. Despite its potential for high profits, trading is inherently connected with significant risk.

Do Proper Research 

Before initiating a trade, it is crucial to conduct thorough research on the specific stock or index using technical analysis based on charts. This analysis aids in identifying key levels of the stock, as well as the stock's strength and trend.

Numerous popular online stock trading software options are available to traders, offering the capability to identify trading opportunities automatically. These software systems generate trading signals promptly when specific events occur on the technical charts.

Use of Stop Loss 

The use of stop loss is vital in trading as it helps to minimize losses and prevents emotions from clouding your judgment. Capital protection should be prioritized over pursuing profits, as there will always be opportunities to earn profits in the market as long as your capital is safeguarded. Many traders overlook the importance of stop loss, which often leads to significant financial losses.

Never Overtrade  

Overtrading can be extremely detrimental to your trading success. It becomes increasingly challenging to effectively manage a higher number of trades. It's important to only trade an amount that you feel comfortable with. It's advisable to keep the number of trades limited to 2-3.

If one trade has already provided you with a satisfactory profit, it's best to consider closing that trade and shifting your focus to other tasks or taking some time to relax. When selecting trades, always consider the Risk Reward Ratio as a guiding factor for your decision-making process. This approach can help you make well-informed trading choices.

Be Disciplined

The key quality of highly successful day traders lies in their ability to avoid over-trading, refrain from going against the trend, and promptly cut losses. It's crucial to keep emotions like fear and greed out of trading decisions. These steps are important for maintaining a successful trading strategy.

Follow The Trend 

To improve your success in Intraday Trading, always keep in mind that "Trend is your Friend." It's crucial to align your trades with the prevailing trend. In an upward trend, focus on strong stocks with long positions on the charts. Conversely, in a downward market, consider weaker stocks for shorting. Avoid trading against the trend, as trading with the trend offers a safeguard even if you make an incorrect decision, preventing substantial losses.

Liquidity 

When trading stocks, it's important to focus on highly liquid shares. Liquidity refers to the volume of shares being traded and high liquidity is beneficial for day trading stocks. In liquid stocks, it's easier to enter and exit trades, and you can do so near the last traded price.

Profit Taking 

Exiting the market at the right time is crucial for successful trading. It's essential to take profits when your target is achieved, as money is made in markets only when you exit. Allowing profits to run beyond targets can lead to greed, which is risky for trading.

The market can turn around unexpectedly, causing potential losses after consuming all the profit. Cutting losses is also vital for successful trading. If the market is not moving as anticipated, it's necessary to exit your position. It's important not to be stubborn and to allow the market to do what it wants.