TradingIntraday Trading Formulae and

Rules
Intraday Trading Formulae and Rules
The intraday trading formulae are useful for finding your Target price and Stop loss in
intraday trading. Apart from these formulae, Intraday trading requires to follow certain day
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 for traders 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 or day trading in a section of
traders.

It is easy to start with day trading. All you need is a stock trading account. However, it is
tough to master intraday trading.

Let us find out what is intraday trading and what is the best way to day trade stocks!

Table of Contents
1. What Is Day Trading?
2. Stock Trading Strategies
3. Having A Proper Mindset And Psychology
4. Control Over The Emotions
5. Having A Plan
6. Intraday Trading Formulae
7. Opening Range Breakout Theory
8. Pivot Point Theory
9. Fraction Theory
10. 2652 Theory of Intraday Trading
11. Technical Charts In Intraday Trading
12. Intraday Trading Rules

13. 1. Use Surplus Cash Only

14. 2. Do Proper Research
15. 3. Use of Stop Loss
16. 4. Never Overtrade
17. 5. Be Disciplined
18. 6. Follow The Trend
19. 7. Liquidity
20. 8. Profit Taking

1. User Review
 2. Intraday Trading-Formulas and Rules

What Is Day Trading?

Before we learn about Intraday trading formula or rules, let us have some idea about what
is Intraday Trading!

Intraday trading or day trading, as the name is self-explanatory, is the technique of taking
long or short position in markets and squaring off (exiting) that position before the close
of the market on the same day.

Learn what is short position and how to short the stocks to make money in falling markets.
Day traders take the advantage of the movement in the price of the stock or the index
during the trading session. The movement can be small or significant. Trade can be for
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 also. You can do that with
margin trading.

Find here what is margin trading and how you can use it effectively to reap big profits with
small limited cash available to you.
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 favorable direction is called Scalping.
Scalpers take several trades during the day. At the end of the day, the profits are
significant. 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,
waiting for the right opportunity. Moreover, the probability of a winning trade in intraday
trading is only 50%.

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 opt for swing trading, positional trading where the trade extends up to days,
weeks or months.
Stock Trading Strategies
Of course, there are some intraday trading formulae which are popular among the
intraday traders. These are Pivot Point Formula or Fraction Theory.

But intraday trading is not all about using formulas. When you are there in the middle, it
is a totally different ball game altogether.
We shall be discussing here all the stock trading strategies useful for day trading.
The things which are very important and need to be taken care of 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.

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.

Having A 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.
These levels are determined on the basis of Technical Analysis and the intraday trading
formulas.

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 Plan.
Having a written trading plan also ensures that you don’t get swayed away by the market
moves when you are in. Without any of these, it is going to be very tough.

Intraday Trading Formulae

Before we move on to the various intraday trading formulae useful for trading, stock
picking for trading is equally important. It is worth learning how to pick intraday trading
stocks.
It is worth mentioning an important hard fact about stock trading is that more than 80% of
the traders loose money in trading. It means that no formula is perfect, otherwise that
figure would had been other way around.
But that does not mean that these formulae are useless. These are the most popular and
commonly used formulae for intraday trading.

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 a popular day trading strategy. This 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.

Usually first 30 minutes of market opening are taken for finding the opening range for a
stock. This period involves high volume trades and are very volatile. After the first hour or
half-an-hour, the stock tries to establish a trend for the remaining part of time of the day
trade.

In this strategy, the high and low price a stock makes in first 30 minutes is marked. The
chart used for intraday trading is 5 minute chart. The two most popular moving averages
: 5 period Exponential Moving Avergae and 20 period Exponential Moving Aversge 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.

You should make a habit to trade in the direction of overall market trend only.

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 and Resistance 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.

Pivot Point Theory helps you predict the intraday stock movement for next trading day.
You can easily calculate the stop loss and target levels to make your trading profitable.
With this day trading formula, you can get 3 Resistance Levels and 3 Support Levels. The
Resistance Levels are your Target Prices and the Support Levels are your Stop loss
Levels for day trading.
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.

Nowadays, you don’t need to calculate Pivot Points by yourself. They are provided by the
trading software. They are also shown in the Quote Box for stock prices. Two support and
resistance levels are also given there.
Coming back to the Pivot Point Formula, we select a stock for Intraday Trading. For that
stock, we need its previous day trading data – 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 value. With that signal,
short selling can be done below the pivot point or below first or second resistance level.

You can read about best settings of stochastics for swing and day trading.
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.

Technical Charts In Intraday Trading

You can use technical analysis based on short-term charts for stock to know the trend
and other indicators of technical analysis. Buy stock which show uptrend while look to
short which are down trending.

This is similar to Opening range Breakout Strategy we talked above except taking into
consideration the ORB.

Exponential moving averages for time periods of 5 and 20 are quite useful with 5 minute
intraday candlestick chart. 5 and 20 EMA crossover is very useful for short term trading.

When the 5 period EMA crosses above the 20 period EMA, it makes a good buy signal
for day trade. The thing to ensure before taking trade is that price should be taking support
at 20 period EMA line.

For a short trade or short selling, 5 period EMA should be crossing below 20 period EMA
line. Again, prices should be taking resistance at 20 period EMA line before you take your
short trade.
The volume should be more than average at the time of crossover so as to avoid false
signals.

For stoploss of your long trade, you can use lowest point of previous green candle which
took support at 20 EMA. Similarly, for short trade, keep stoploss just above the highest
point of previous red candle taking support at 20 EMA.

You should book profits when you have made reasonable profits and get out of the market
quickly. Otherwise, you may let the profits keep running until the prices break the 5 EMA.
Here, you may book 50% of the profits. At break of 20 EMA, position should be closed.

You can try this method with virtual trading or paper trading before taking actual trades.

As we talked above, stock trading is an art. No indicator is perfect and will make you
money. They will only guide you in taking decisions. You will have to develop the art of
making money in markets with hard work, practice and patience by yourself only.

If you prefer to use trend lines on intraday charts to take buy or sell call on your trade then
5 Minute Bar Chart can be a good option to use for Intraday Trading.
Only formulae do not work to survive in Intraday Trading. There are certain strict day
trading rules which you need to follow.

Intraday Trading Rules

I again would like to emphasize that Intraday Trading is very risky for your capital.
Positional trading can be more rewarding than intraday trading.

Profits can be huge with positional trading with minimum risk. I am telling you this from
my own experience.

Traders who want to go for day trading, should strictly follow the below rules. The intraday
trading rules are as important as the Intraday Trading Formula and keep the most
successful day traders ahead of their peers.
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.

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.

Read how to manage risk by keeping losses to the minimum and maximize the profits in
stock trading.
 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 are 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.