How is profit or loss calculated in intra-day trading? Is it based on the closing or opening price of the stock?

 

   Intraday trading, also known as day trading, involves buying and selling financial instruments within the same trading day. Unlike long-term investing, where positions are held for months or years, intraday trading focuses on capitalizing on short-term market movements. The profit or loss in intraday trading is determined by the difference between the buying and selling prices of the stocks, adjusted for any transaction costs. Importantly, this calculation is not directly tied to the opening or closing prices of the stock unless the trades are executed at these specific times.

 

Key Components of Intraday Trading Profit or Loss Calculation

 

Buying price (Entry Price):  This is the price at which the stock is purchased during the trading day. Intraday traders aim to buy low and sell high within the same day.

 

Selling price (Exit Price):  This is the price at which the stock is sold. The selling price can be higher or lower than the buying price, determining the profit or loss.

 

Transaction costs:  These include brokerage fees, taxes, and other charges associated with executing the trades. Transaction costs can significantly impact the net profit or loss.

 

Number of shares traded:  The total profit or loss is also influenced by the volume of shares bought and sold. Higher volumes can amplify both gains and losses.

 

Basic profit or loss calculation

 

The formula for calculating the profit or loss from an intraday trade is:

 

Profit/Loss

=

(

Selling Price

−

Buying Price

)

×

Number of Shares

−

Transaction Costs

Profit/Loss=(Selling Price−Buying Price)×Number of Shares−Transaction Costs

 

Example calculation

 

   Let’s illustrate this with an example. Assume you buy 100 shares of a stock at ₹500 each and sell them later in the day at ₹520 each. The brokerage fee per trade is ₹100, and other transaction costs amount to ₹50.

 

Buying Price: ₹500

Selling Price: ₹520

Number of Shares: 100

Total Buying Cost: ₹500

×

× 100 = ₹50,000

Total Selling Proceeds: ₹520

×

× 100 = ₹52,000

Transaction Costs: ₹100 (buying) + ₹100 (selling) + ₹50 (other costs) = ₹250

Now, we calculate the profit:

 

Profit

=

(

Selling Proceeds

−

Buying Cost

)

−

Transaction Costs

Profit=(Selling Proceeds−Buying Cost)−Transaction Costs

 

Profit

=

(

₹

52

,

000

−

₹

50

,

000

)

−

₹

250

Profit=(₹52,000−₹50,000)−₹250

 

Profit

=

₹

2

,

000

−

₹

250

Profit=₹2,000−₹250

 

Profit

=

₹

1

,

750

Profit=₹1,750

 

So, the net profit from this intraday trade is ₹1,750.

 

Impact of opening and closing prices

 

   While the opening and closing prices are significant in the broader context of stock market analysis, they are not directly used in the calculation of intraday trading profit or loss unless you execute trades at these prices.

 

Opening price:  This is the price at which a stock starts trading when the market opens. It sets the initial tone for the trading day but does not affect your profit or loss unless you execute trades at this price.

 

Closing price:  This is the last price at which a stock is traded on a given day. While it reflects the final sentiment of the trading day, it only matters for your trades if you buy or sell at this price.

Factors influencing intraday trading profit or loss

 

Market volatility:  Higher volatility increases the potential for profit and risk of loss, as stock prices can swing dramatically within the trading day.

 

Execution speed:  The speed at which trades are executed can affect the actual buying and selling prices, especially in a fast-moving market.

 

Technical analysis:  Intraday traders often rely on technical indicators, such as moving averages, RSI (Relative Strength Index), and MACD (Moving Average Convergence Divergence), to make informed trading decisions.

 

News and events:  Market news, earnings reports, economic data releases, and other events can cause rapid price movements, impacting intraday trading outcomes.

 

Example of an intraday trading scenario

 

Consider a scenario where a trader uses technical analysis to make a series of trades in one day. The stock in question has the following prices during the trading day:

 

Opening Price: ₹480

High: ₹530

Low: ₹475

Closing Price: ₹510

The trader identifies a buy signal at ₹490 and sells at ₹515. The trader makes 10 such trades throughout the day, each involving 50 shares. Let’s calculate the total profit or loss.

 

Number of Trades: 10

Number of Shares per Trade: 50

Total Shares Traded: 10

×

× 50 = 500

Buying Price per Trade: ₹490

Selling Price per Trade: ₹515

Total Buying Cost: 10

×

× 50

×

× ₹490 = ₹245,000

Total Selling Proceeds: 10

×

× 50

×

× ₹515 = ₹257,500

Transaction Costs: Assume ₹150 per trade

×

× 10 = ₹1,500

Now, we calculate the net profit:

 

Profit

=

(

Total Selling Proceeds

−

Total Buying Cost

)

−

Total Transaction Costs

Profit=(Total Selling Proceeds−Total Buying Cost)−Total Transaction Costs

 

Profit

=

(

₹

257

,

500

−

₹

245

,

000

)

−

₹

1

,

500

Profit=(₹257,500−₹245,000)−₹1,500

 

Profit

=

₹

12

,

500

−

₹

1

,

500

Profit=₹12,500−₹1,500

 

Profit

=

₹

11

,

000

Profit=₹11,000

 

The net profit from these intraday trades is ₹11,000.

 

Strategies to enhance profitability in intraday trading

 

Technical analysis:  Using charts and technical indicators can help identify entry and exit points.

 

Risk management:  Implementing stop-loss orders to limit potential losses.

 

Diversification:  Trading multiple stocks to spread risk.

 

Stay informed:  Keeping up with market news and trends that can impact stock prices.

 

Practice discipline:  Sticking to a trading plan and avoiding impulsive decisions.

 

Conclusion

 

   Calculating profit or loss in intraday trading fundamentally revolves around the prices at which trades are executed and the associated transaction costs. While the opening and closing prices of a stock provide context for the day’s market movement, they only directly influence your profit or loss if your trades occur at these prices. Successful intraday trading requires a robust strategy, quick decision-making, and an understanding of market dynamics to navigate the potential gains and risks effectively. Understanding the nuances of buying and selling prices, transaction costs, and the influence of market conditions is crucial for making informed trading decisions and optimizing profitability.