What Are The Risks Involved In Intraday Trading?

Intraday trading involves buying and selling stocks in the market within the same day. The opportunity to earn high returns in intraday trading comes with the possibility of high risks. Understanding and identifying risks associated with intraday trading help traders chart out strategies and methods to avoid or minimise them.The principal risks involved in intraday trading are-

Stock selection risk is the possibility that refers to the possibility of loss due to incorrect selection of stocks. This is the primary risk that looms over intraday trade. Even experienced traders make mistakes when it comes to picking up stocks and creating a profitable portfolio-mix.Although intraday trading employs tools like charts and ratios, fundamental research as well as technical analysis, these methods do not guarantee profits. Therefore, stock selection can never be fool-proof.

High price fluctuations and unpredictability in the market are core elements of market volatility risk. This risk pertains to the possibility of loss due to adverse and sudden changes in the market impacting stock prices. Market volatility risk may exist even after selecting the right stocks and following appropriate trading strategies. This risk can only be managed (by choosing stocks of well-established companies that have indicated a tendency to remain stable), but it cannot be controlled.

Leveraging allows investors to take exposures in the market that are much higher than they can afford to cover. However, taking high exposures comes with the risk of magnified loss. Thus, trading on high margins is a double-edged sword. It provides the trader with an opportunity to earn higher returns but the possibility of making a loss also intensifies.

Intraday traders could often be misled by their emotions which motivate them to take higher risks than they can afford. Many traders fall in the trap of being driven by their instincts and overtrading in pursuit of higher profits. Since intraday trading is based on speculating on the price movement of stocks, psychological addition to trading could lead to compulsive gambling. Extreme competitiveness, obsessing over past losses and downplaying the risks involved are all indicators of psychological addition to intraday trading.Although intraday trading involves several potential risks, there are various risk-management strategies that investors could adopt such as- setting a target price and stop-loss levels, discipling their mind to not indulge in obsessive behaviours, picking stocks after extensive research, etc.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.