Intraday Trading Rules and New SEBI Regulations

Intraday trading has become popular in India, particularly among retail investors looking to earn profits by taking advantage of frequent market fluctuations. While the opportunity for substantial profit exists, it is accompanied by the risk of considerable losses, which can be worsened by leverage and excessive speculative trading practices. The SEBI has introduced new regulations to protect retail investors, focusing on margin requirements, reduction in weekly expiries, etc. These regulations demonstrate SEBI’s dedication to fostering a balanced marketplace that allows both experienced traders and newcomers to engage with minimum exposure to high risks. SEBI is implementing these measures to mitigate excessive speculation and foster responsible trading practices.

In this blog, we will learn about intraday trading and the rules new traders can follow to succeed. Moreover, we will discuss the new regulations implemented by the SEBI.

What is Intraday Trading?

Intraday trading is a trading approach in which securities, such as stocks, currencies, commodities, etc., are bought and sold within the same trading day. Intra-day traders aim to earn profits from short-term price fluctuations in the market and do not carry their positions overnight.

Key facts about Intraday trading

• Intraday trading is carried out in short time frames, such as 1 minute, 5 minutes, 15 minutes, 1 hour, and 4 hours.
• Day traders develop a strategy based on technical analysis and get an opportunity to leverage their trading position, enabling them to buy more stocks with a lesser amount of capital. However, the availability of leverage varies based on asset class.
• Intraday traders tend to be prompt decision-makers to capture frequent price fluctuations executions.

7 Important Rules for Successful Intraday Trading

Here are seven essential rules for successful intraday trading:

1. Create a Plan for Trading

Establish a clear plan for your entry and exit points, stop-loss measures, and profit targets. Stay true to your plan and avoid hasty choices because of short-lived price movements. Set the risk-reward ratio of at least 1:2 to remain profitable over the long run.

2. Use Stop-Loss

Utilize stop-loss orders to protect your capital by limiting the maximum loss when a trade goes unfavorably. A stop-loss is essential for risk management, especially in a highly volatile market.

3. Don’t Let Emotions Dominate

Your judgment and trading decisions can be affected by fear, greed, or impatience. Stay calm, and do not trade on emotions. Focus on technical signals rather than on revenge trading or trying to recover losses. Being patient and maintaining objectivity will help you achieve success in the long term.

4. Follow-up With Market Events and News

Stay informed about economic reports, earnings, company announcements, and market trends that could sway your investment decisions. Mark out important events that could lead to wide price swings.

5. Trade Liquid Stocks

Small bid-ask spreads reflect high liquidity, which, in turn, leads to quick execution of orders alongside minimal price movement. A quick entry and exit from a position is critical for an intraday trader, which makes liquidity important. Search for stocks with high daily trading volume for smoother transactions.

6. Set Realistic Profit Targets and Manage Expectations

Consistent, incremental gains lead to superior outcomes than pursuing substantial profits from a single trade. Set realistic targets and stick to your exit strategy when you reach them. Resist the urge to hold investments beyond targets in the hope of earning greater returns, as this can ultimately result in losses.

7. Review and learn from trades regularly

Keep a trading journal, noting the logic behind each trade, outcomes, and lessons learned. Analyze both successful and unsuccessful trades to uncover patterns and learn from mistakes. Regular evaluation helps identify mistakes, improve strategies, and enhance future trading decisions.

New SEBI Rules for Intraday Trading

The SEBI has implemented a series of new regulations for intraday and derivatives trading designed to reduce risks and deter speculative trading practices.

1. Increased Contract Sizes: According to SEBI’s new regulations, the contract size of index derivatives would increase from INR 5-10 lakh to INR 15 Lakh from 20 November 2024, with a maximum contract value of INR 20 lakh. The restriction would protect small traders and reduce speculative activities.

2. Weekly Expiry Limitations: SEBI has announced a significant reduction in the number of weekly expiry contracts from 20 November 2024, i.e. weekly derivative contracts would only be available on one benchmark index for each exchange. Only the Nifty and Sensex indices will have weekly expiries.

3. Upfront Collection of Premiums: Starting 1 February 2025, brokers will be required to collect entire option premiums in advance. This will prevent traders from using too much leverage and ensure they have enough funds or collateral for their positions.

4. Intraday Monitoring: Beginning on 1 April 2025, exchanges will implement intraday monitoring of position limits for index derivatives. This step will ensure that traders remain compliant with the permitted limits, as their positions will be assessed multiple times throughout the trading day.

5. Elimination of Calendar Spread Benefits on Expiry Days: SEBI has officially removed the calendar spread benefits, i.e. traders will no longer be allowed to create offsetting positions across different expiries on the expiry day from 1 February 2025.

6. Additional Margins on Expiry Days: An Extreme Loss Margin (ELM) of 2% will be applicable for short positions in options on expiry days from 20 November 2024. This step is aimed to protect against increased volatility.

Practical Tips and Strategies for Intraday Success

Below are some practical tips and strategies a trader can follow to increase their chances of success in intraday trading.

• Select the right stocks: Choose stocks with significant daily price fluctuations, as they present greater chances of profit.
• Seek out Liquid Stocks: High-volume stocks enable traders to quickly buy and sell shares without significantly affecting the price, which is important for successful intraday trading.
• Use Chart and Indicators: Utilize charts and indicators such as moving averages, MACD, RSI, etc., to identify trends and make well-informed decisions. Identify patterns such as double tops, head and shoulders, triangles, etc., to predict price reversals or breakouts.
• Timeframes are Crucial: Traders usually focus on shorter intervals, like the 5-minute or 15-minute charts, while monitoring longer trends to grasp the overall market sentiment.
• Master Timing with the Right Entry and Exit Points: Individuals should avoid trading until the market stabilizes post-opening bell, as the first 15-20 minutes can be marked by volatility and unpredictability. Traders can try scalping for quick trades and small profits. Alternatively, individuals can do momentum trading, where you hold positions as long as the price trend is favorable.
• Stay Disciplined: Avoid impulsive trades and follow a structured plan with pre-determined entry, exit, and stop-loss levels. Stick to a set number of trades per day and focus on quality rather than on quantity of trades.
• Paper Trade: You traders can do paper trading to practice new strategies without risking real money until you are more confident. It helps you assess strategies success rate and how well it aligns with your trading style. Refine your risk management skills and familiarize yourself with various market situations.
• Use News-Based Trading Strategies: Keep track of news and announcements, like earnings reports and economic updates, that could affect stock prices. Identify gap-and-go trading opportunities, i.e., stocks that open with a gap from news events usually keep trending in that direction during the early trading session.

Conclusion

The recent updates to SEBI’s intraday trading regulations highlight the board’s commitment to cultivating a stable and secure market atmosphere. SEBI is taking these measures for retail investors who may be more vulnerable to losses in volatile market conditions. These new regulations will force traders to adopt more cautious strategies, focusing on thoughtful decision-making over high-frequency, speculative trading. Tightened regulations may seem restrictive, but they protect investors and support long-term market health. To successfully adapt to these changes, embracing flexibility and focusing on quality over quantity in trading practices is essential.

Frequently Asked Questions (FAQs)