Intraday or Positional?
So that you have decided that you are convinced that trading is the profession for you and that futures and options will be part of your trading tactics. The next question is, should you trade intraday or positional?
In Intraday trading, you never carry overnight positions. In other words, all open positions are exited before the market closes and you will have a net profit or loss based on your trades.
In Positional trading, you will carry overnight positions based on your trading method, risk management approach and the time frame of interest. You could be positional with 1-2 day time frame as the basic reference period to book profits or you could carry trades longer for a week or so or months. The canvas is open to you.
You may say that intraday volatility may be too much to handle, and therefore you will choose to trade in a longer time frame. Thats a fallacy! Every time frame of price action repeats itself in other time frames higher and lower than itself. The price patterns may not be the same, but the impact of volatility is the same. The answer really is in the characteristics of each time frame. Lets examine that in the next three sections.
In Intraday trading, you never carry overnight positions. In other words, all open positions are exited before the market closes and you will have a net profit or loss based on your trades.
In Positional trading, you will carry overnight positions based on your trading method, risk management approach and the time frame of interest. You could be positional with 1-2 day time frame as the basic reference period to book profits or you could carry trades longer for a week or so or months. The canvas is open to you.
You may say that intraday volatility may be too much to handle, and therefore you will choose to trade in a longer time frame. Thats a fallacy! Every time frame of price action repeats itself in other time frames higher and lower than itself. The price patterns may not be the same, but the impact of volatility is the same. The answer really is in the characteristics of each time frame. Lets examine that in the next three sections.
Intraday Trading
Intraday trading is simply the trading style where you open trading positions after the markets open in the morning of any trading day and close them before the end of the day. In 24 hours markets, you simply close positions at the end of your trading day.
By definition, the price action in an intraday trade will be a fraction of the daily average traded range. Therefore, if the daily range is 100 points, your trades may target 20/30/50 points for example. In a positional trade, the ranges are relative to the period of interest and will be multiples of these numbers.
In daily trades, most brokers/markets permit trading with smaller exposure and higher leverage. So while trading Nifty futures in an overnight trade, you need a margin of Rs 25000, for intraday trading, the margin is around Rs 18000 or about 30% lower. Depending on your brokers policies, you may be required to close all your positions about 15 minutes to 30 minutes before the market close or they are auto closed. This may or maynot cause a problem, based on your trading method.
The more important point to be noted though is that the working capital needed for intraday trades is generally much lower than for positional trades.
The second aspect is to consider the relative volatility of price moves. Just as you move from 1 minute to 5 minute to 15 minute or hourly charts, the intraday price movement gets "damped", the time frame that you choose to trade in becomes important. Many experts suggest combining a look forward and look back approach. Which means if you trade 5 minute charts, you may get the first signs of a new trade on a 1 minute chart and use that for entry of the trade. In the same way, the bigger picture in the 15 minute and hourly charts tells you the general market sentiment - bullish and bearish and the likelihood of the trade to continue in your chosen trade direction. A long trade in a bearish market would be the territory of a scalp trader or an aggressive trader expecting a reversal, but a high risk trade in any case. Likewise a long trade in a bullish sentiment in higher time frames is a safer trade.
Probably, the most important factor that will determine your trading choice, is the amount of time you have to trade in a day. If you are a full time trader and have a trading method that works in intraday time frames, you could consider intraday trading AFTER evaulating the risks.
What are the risks that we are talking about? In intraday trades for Nifty futures, for a target of 25 points, if we setup stop losses of 15 points (say) and expect to trade 3-4 times in a day. Your maximum risk is 15 x 4 = 60 points or 60 x 50 units per Nifty lot = Rs 3000 per lot. Is that affordable for you? The same risk for one lot mini nifty with 20 units = 60 x 20 = Rs 1200 per lot. Assuming that you will do 15 trades in a week with a 60% success rate or 6 losing trades, or 90 points or Rs 90 x 50 = Rs 4500 for Nifty futures and Rs 1800 for mini Nifty futures. Do these numbers fall in the range of your trading risk tolerance? Multiply these numbers with number of lots (contracts) that you intend to trade per trade and you get your total risk exposure. For 2 lots its Rs 9000 or Rs 3600 for Nifty/Minifty futures respectively.
If the answers are yes, then you can consider intraday trading.
We are only evaluating, whether you should trade intraday or not. Not when you should stop trading, if you make losses. Thats a part of risk management covered in "Build your trading strategy" (click here).
Next step, what will it take to succeed in intraday trading? You need a trading method which will generate better than 50% successful trades so that you have the hope of making money. Combine this with the approach to treating trading as another business or profession, and you are ready to go!
By definition, the price action in an intraday trade will be a fraction of the daily average traded range. Therefore, if the daily range is 100 points, your trades may target 20/30/50 points for example. In a positional trade, the ranges are relative to the period of interest and will be multiples of these numbers.
In daily trades, most brokers/markets permit trading with smaller exposure and higher leverage. So while trading Nifty futures in an overnight trade, you need a margin of Rs 25000, for intraday trading, the margin is around Rs 18000 or about 30% lower. Depending on your brokers policies, you may be required to close all your positions about 15 minutes to 30 minutes before the market close or they are auto closed. This may or maynot cause a problem, based on your trading method.
The more important point to be noted though is that the working capital needed for intraday trades is generally much lower than for positional trades.
The second aspect is to consider the relative volatility of price moves. Just as you move from 1 minute to 5 minute to 15 minute or hourly charts, the intraday price movement gets "damped", the time frame that you choose to trade in becomes important. Many experts suggest combining a look forward and look back approach. Which means if you trade 5 minute charts, you may get the first signs of a new trade on a 1 minute chart and use that for entry of the trade. In the same way, the bigger picture in the 15 minute and hourly charts tells you the general market sentiment - bullish and bearish and the likelihood of the trade to continue in your chosen trade direction. A long trade in a bearish market would be the territory of a scalp trader or an aggressive trader expecting a reversal, but a high risk trade in any case. Likewise a long trade in a bullish sentiment in higher time frames is a safer trade.
Probably, the most important factor that will determine your trading choice, is the amount of time you have to trade in a day. If you are a full time trader and have a trading method that works in intraday time frames, you could consider intraday trading AFTER evaulating the risks.
What are the risks that we are talking about? In intraday trades for Nifty futures, for a target of 25 points, if we setup stop losses of 15 points (say) and expect to trade 3-4 times in a day. Your maximum risk is 15 x 4 = 60 points or 60 x 50 units per Nifty lot = Rs 3000 per lot. Is that affordable for you? The same risk for one lot mini nifty with 20 units = 60 x 20 = Rs 1200 per lot. Assuming that you will do 15 trades in a week with a 60% success rate or 6 losing trades, or 90 points or Rs 90 x 50 = Rs 4500 for Nifty futures and Rs 1800 for mini Nifty futures. Do these numbers fall in the range of your trading risk tolerance? Multiply these numbers with number of lots (contracts) that you intend to trade per trade and you get your total risk exposure. For 2 lots its Rs 9000 or Rs 3600 for Nifty/Minifty futures respectively.
If the answers are yes, then you can consider intraday trading.
We are only evaluating, whether you should trade intraday or not. Not when you should stop trading, if you make losses. Thats a part of risk management covered in "Build your trading strategy" (click here).
Next step, what will it take to succeed in intraday trading? You need a trading method which will generate better than 50% successful trades so that you have the hope of making money. Combine this with the approach to treating trading as another business or profession, and you are ready to go!
Positional Trading
Positional trading is that trading style, where you are ready to carry positions as long as the trade demands for one or more days, weeks or months. The time frame is your choice for positional trading.
A short term positional trader may carry positions for just a few days.
A long term positional trader may carry positions for days, weeks or months.
Whats the difference between positional and intraday trading then?
The trading method that you use could be the same. What changes is the working capital needs and the risk capacity. These are generally much higher.
Thus for a basic positional trade you probably will need 50% or more working capital as margin to carry futures contracts overnight - check with your broker on specifics. Thats the first major difference.
As the positional trading ranges are much larger than the daily ranges, the stop loss risks can (though not neccessarily always) higher than intraday risks. While you may use 15-20 point stop loss limits for Nifty Futures in intraday trades (scale unit value approx 500), you will use a stop loss of 15-50 points in short term positional trading and 40-150 or more points stop loss levels in long term positional trades.
As you can see, that the risk increases from that of intraday trades, but not neccessarily above your affordability, as the risk remains unchanged during any trade, and you dont multiply it because of additional trades as in intraday trades, as positional trades run for longer periods typically. So while you may have 15 trades in intraday trading in a week, you may have just 2-5 short term positional trades in the same period. Based on the stop loss levels, you can see, that the overall risk tolerance is probably the same and may even be lower in positional trades as compared to intraday trades.
For intraday trades the nominal risk with a 60% success ratio is 40% x 15 = 6 trades x 15 points x 50 units per lot = Rs 4500 in a week.
For positional trades assuming a 60% success ratio 40% x 5 = 2 trades x 25 points stop loss x 50 points per unit = Rs 2500 in a week.
As you can see, in the illustration, positional trades may require lower risk tolerance as compared to intraday trades.
However, there is one major risk that gets introduced. Thats of gap up and gap down openings every day. That may seem significant and may upset the equation above significantly. Well, the answer is no. Once again, because gaps tend to follow the underlying trend about 70% of the time. Lets say the average gap up/down is 30 points and you have gap openings 50% of the time. Whats the additional risk?
On a weekly basis we then are talking of 3 possible gap openings with a failure rate of 30% = 1 instance, or a risk of 30 points. Our positional risk increases from 25 to 55 points which is still lower than the 90 points for intraday trades.
A short term positional trader may carry positions for just a few days.
A long term positional trader may carry positions for days, weeks or months.
Whats the difference between positional and intraday trading then?
The trading method that you use could be the same. What changes is the working capital needs and the risk capacity. These are generally much higher.
Thus for a basic positional trade you probably will need 50% or more working capital as margin to carry futures contracts overnight - check with your broker on specifics. Thats the first major difference.
As the positional trading ranges are much larger than the daily ranges, the stop loss risks can (though not neccessarily always) higher than intraday risks. While you may use 15-20 point stop loss limits for Nifty Futures in intraday trades (scale unit value approx 500), you will use a stop loss of 15-50 points in short term positional trading and 40-150 or more points stop loss levels in long term positional trades.
As you can see, that the risk increases from that of intraday trades, but not neccessarily above your affordability, as the risk remains unchanged during any trade, and you dont multiply it because of additional trades as in intraday trades, as positional trades run for longer periods typically. So while you may have 15 trades in intraday trading in a week, you may have just 2-5 short term positional trades in the same period. Based on the stop loss levels, you can see, that the overall risk tolerance is probably the same and may even be lower in positional trades as compared to intraday trades.
For intraday trades the nominal risk with a 60% success ratio is 40% x 15 = 6 trades x 15 points x 50 units per lot = Rs 4500 in a week.
For positional trades assuming a 60% success ratio 40% x 5 = 2 trades x 25 points stop loss x 50 points per unit = Rs 2500 in a week.
As you can see, in the illustration, positional trades may require lower risk tolerance as compared to intraday trades.
However, there is one major risk that gets introduced. Thats of gap up and gap down openings every day. That may seem significant and may upset the equation above significantly. Well, the answer is no. Once again, because gaps tend to follow the underlying trend about 70% of the time. Lets say the average gap up/down is 30 points and you have gap openings 50% of the time. Whats the additional risk?
On a weekly basis we then are talking of 3 possible gap openings with a failure rate of 30% = 1 instance, or a risk of 30 points. Our positional risk increases from 25 to 55 points which is still lower than the 90 points for intraday trades.
Long term Positional Trading
In this form of trading you are trading like an investor with a horizon of weeks and months. Because the trading ranges are larger, the stop loss risk levels can go to as high as 100-200 points while the rewards can go from 200-1000 points or more. Once you have tasted success in intraday or short term positional trading described above, you can then consider this form of trading.
What should I choose then?
Score the following questions and derive your answer:
Rate each answer -10 for bias to intraday and +10 for positional on a continuous scale. And give a weight of 0.3 for each answer.
Q1. I can invest in less capital required for intraday trading. Positional is not affordable. +10 for high capital affordability and -10 for low capital affordability.
So if your answer is -5, or biased to intraday trades, your weighted answer = -5 x 0.3 = -1.5 at this stage.
Q2. I can accept the higher risk for intraday trades versus the lower risk for positional trades as described above. +10 for low risk tolerance vs -10 for high risk tolerance.
If your answer is +4, or biased towards the risk that positional trading offers, your weighted score for this question is +4 x 0.3 = 1.2
Q3 I am a full time trader and can sit in front of a computer all day for intraday trades vs No I cant. -10 for full time trading vs +10 for part time trading.
If your answer is -8, your weighted score is -8 x .3 = -2.4
Your net score is then -1.5+1.2-2.4 = -2.7 or a moderate bias towards intraday trading.
Examine the different aspects of each of the questions as described above and go for intraday trading. Good luck!
Likewise, if your score indicates that you would be better off as a positional trader, so be it! Good luck to you too!
Rate each answer -10 for bias to intraday and +10 for positional on a continuous scale. And give a weight of 0.3 for each answer.
Q1. I can invest in less capital required for intraday trading. Positional is not affordable. +10 for high capital affordability and -10 for low capital affordability.
So if your answer is -5, or biased to intraday trades, your weighted answer = -5 x 0.3 = -1.5 at this stage.
Q2. I can accept the higher risk for intraday trades versus the lower risk for positional trades as described above. +10 for low risk tolerance vs -10 for high risk tolerance.
If your answer is +4, or biased towards the risk that positional trading offers, your weighted score for this question is +4 x 0.3 = 1.2
Q3 I am a full time trader and can sit in front of a computer all day for intraday trades vs No I cant. -10 for full time trading vs +10 for part time trading.
If your answer is -8, your weighted score is -8 x .3 = -2.4
Your net score is then -1.5+1.2-2.4 = -2.7 or a moderate bias towards intraday trading.
Examine the different aspects of each of the questions as described above and go for intraday trading. Good luck!
Likewise, if your score indicates that you would be better off as a positional trader, so be it! Good luck to you too!