What are intraday trading and scalping?

What is intraday trading?

Intraday trading, also known as day trading, is a trading strategy in which traders open and close trading positions on the same day. This means that they do not hold them overnight. It is therefore a very active and fast form of trading that is based on trading smaller price movements.

In intraday trading, the trader mainly uses technical analysis. Fundamental analysis is of limited importance, the trader basically limits it to learning the dates of significant fundamental events. Once the news is published, the trader tries to take advantage of the volatility that usually arises as a result of the news. The actual outcome of the news is not so important for a day trader.
 

In intraday trading, there may be an illogical reaction in the market to a published fundamental report

For example, on 1 June 2023, a significant increase in oil stocks was reported. This should be a negative signal for oil and the price of oil should, therefore, fall. However, after the report, oil rose quickly as you can see in chart 1. If an intraday trader or scalper was stuck in the mindset that oil should fall because of this report, they could record a loss.

What intraday trading strategies seek to do is to free the trader somewhat mentally from the outcome of the fundamentals so that he or she can correctly "see" the movement that was rapidly unfolding in the market after the report and ride that volatility.

_{WTI crude oil on the 15-minute time frame}

Intraday trading is further divided into:

Standard intraday trading

A trader holds transactions for several hours within one trading day. In intraday trading, the strategy tries to capture transactions that have a probable potential to move approximately 1/2 of the average daily range. However, this is not dogma. Some intraday traders try to capture transactions that will yield at least 10 pips and exit the position when that is reached. It can be said that one to a maximum of two trading signals will be generated on a single instrument within a trading day. However, there are also days when no signal is generated.
 

Scalping

In this method of trading, the trader holds transactions for a few seconds or minutes. Also, the distances to profit are very small, sometimes up to 5 pips. It is typical for scalping strategies to have a negative risk/reward ratio, meaning that average gains tend to be lower than average losses. This means that in order to be profitable, a trader must achieve higher probability trades.

In scalping, multiple trading signals may occur per day. Thus, some traders will make around 10 or more trades in a single trading day. However, it must be remembered that scalping is not about impulsively clicking into the platform depending on every candle movement.

In general, when trading, it is only necessary to enter trades when a signal arises according to the trading plan. It is necessary to be absolutely precise about what the trading signal will look like, when to enter the transaction, where to put a stop loss and where to take profit, and at what times to trade.

All of this must be set up so that it is likely that within one day or a set trading time, the trade will make a profit. Unfortunately, in intraday trading and scalping in particular, this is very difficult to follow due to psychological contexts. More on this in the section on the disadvantages of day trading.

Which markets are suitable for intraday trading?

Markets that can be traded intraday must meet three basic criteria:
 

1. Sufficient liquidity

   A liquid market is one in which there is sufficient supply and demand and it is actively traded. When there are enough traders willing to buy and sell at different prices, it means that you will have no major problem buying or selling at your desired price without a major slippage in order execution.

2. Low spreads

   Due to the fact that the day trader, and especially the scalper, trade small volumes, they need to trade markets where spreads are low. In case you do not know, the spread is the price difference between the BID and ASK prices.

3. Sufficient volatility

   A volatile market is a market that exhibits larger price movements. For intraday trading, it is important that the market is sufficiently volatile because if the price does not make any movements, it is difficult to generate profits. High volatility can be advantageous because it offers the opportunity for quick profits, but it also increases the risk of loss. High volatility often arises during important macroeconomic reports. The disadvantage is that after the immediate publication of news, these movements, while volatile, are also often difficult to predict.

Advantages and disadvantages of intraday trading:

Benefits

1. Undisturbed sleep

   The main advantage of day trading is restful sleep (depending on the situation, of course). Transactions in intraday trading strategies are completed during the trading day, there is no risk of sudden drops during the night and the trader can start the new trading day with a calm mind.

2. Short-term trades

   Intraday trading and scalping allow you to open trading positions for only a short period of time, which helps eliminate the risk of adverse events and market movements that occur when transactions are held for a longer period of time. For some traders, it is frustrating to see that their trade was in profit for two days and ended up in a loss.

3. No fees for negative swaps

   Negative swaps are fees that are charged on certain instruments when you hold a trading position overnight. With intraday strategies, this risk is eliminated.

4. High frequency of trading opportunities

   Scalping usually brings many trading opportunities every day.

5. Flexibility and control

   Intraday trading offers traders control over their trades. Traders have the ability to react to current market conditions and events by quickly entering and exiting trades. An intraday trader or scalper can also adjust their strategy throughout the day based on new information and market conditions.

6. Trading regardless of the market direction

   Intraday trading allows you to trade the markets regardless of their long-term direction. Thus, a trader can benefit from either a short-term rise in price or a short-term fall in the price of a given instrument.

Disadvantages

1. Extreme psychological demands

   Intraday trading and especially scalping are extremely psychologically demanding. Emotions such as fear, greed, and impatience arise very quickly. An emotional trance is created, which leads to impulsive reactions. The hormones that are generated within this emotional trance block the ability to think rationally, which can lead traders to stop following their trading plans. This process often occurs after generating several gains or several losses in a row. The result then tends to be mindless clicking into the platform, where the trader clicks, say, 50 or more trades per hour and keeps doing this until he deletes the entire account.

2. A style unsuitable for beginner traders

   The process described above is related to brain biochemistry rather than overall psychology and cannot be regulated in any way at any given time. Once it is triggered, it can no longer be controlled. In this case, the only solution is to stop trading quickly. And that is the stumbling block. Because in a state of emotional trance, many traders fail to do this. This is why day trading is not a suitable strategy for beginner traders.

3. It requires knowledge of advanced technical analysis

   Intraday trading requires a good knowledge of technical analysis and trading strategies. Training, education, and practice are essential to develop the necessary skills for successful day trading.

4. High technological requirements

   Day trading requires access to fast internet connections and reliable trading platforms. If your internet drops out frequently or platforms freeze up due to outdated computer hardware, you need to resolve these issues first before considering day trading.

What time frames are used for intraday trading?

Intraday traders will likely rely on the H1 chart to identify major support and resistance from the previous day, and the 15-minute (or 5-minute) chart will then be used to identify the signal and confirm the entry.

The 1-minute to 15-minute charts will be available for scalping. Obviously, trading in volatile and liquid markets is required for these strategies.
 

Conclusion

Intraday trading is a style that uses small price movements within each trading day. The advantage is locking in profits during the trading session. In addition to a good knowledge of technical analysis, this style also requires quick reactions and full attention during the time the trader is actively trading. The main disadvantage is the high demand on the trader's psyche and therefore this style is not suitable for beginners.

 

Recommended article:

Key terms