Square Off in Intraday Trading
A legendary trader who made his wealth and kept his health, when questioned about his trade secret, said:'My model is intraday trading; its hypnosis never fading Squaring off my daily positions that's my rule, I'll Never forget this. Do you take me for a fool? and I'm sleeping well at night, don't you think that's cool!'
His wisdom could well help us all!
What is Square Off in Intraday Trading
Leaving no overbought or oversold positions open by the end of intraday trading time is called square off in intraday trading. Stock exchanges follow fixed intraday trading timing in India (i.e., 9.15 am to 3.30 pm), with added pre and post-trade time extensions of 15 mins. Prudent traders watch the opening and closing trends in such sessions to get technical pointers about how the price could move after that. This period also helps smoothen market volatilities and price-in overnight news and events, which impact stock price. At or before the cut-off time, the intraday trade must be squared off in the stock market (or converted into a deliverable trade), failing which auto square off would be triggered by the broker and auto square off charges would be incurred.
Square off in trading could be effected anytime during the intraday trading time, within a reasonable cut-off set by the broker holding the trading account. This ranges from 3 pm to 3.15 pm, depending on contractual terms. If a trader triggers the cut-off time without a square-off in the stock market carried out, it rests on the broker to carry it out at any current market level. This could lead to profits or losses on the closed trades and cannot be contested by the trader legally.
How the trader can execute the Trades in Intraday Trading
Based on various intraday clues, the trader can take a position within Intraday trading time. These may be forecasts based on Technical Analysis, Company level financial data or news, Economic data relating to the stock-specific segment, all of which capture Fundamental Analysis , or just plain old Demand and Supply dynamics.
If the above homework has been thorough, strategies always blueprint an entry price level and the exit for the position based on the predicted trend. The risk-savvy trader would always set a stop loss by opting for a Bracket order.
The actual modus involves placing physical orders via brokers or using the Online or Mobile, highly convenient trading Apps for a variety of functions such as:
Setting up watch lists (Scrips and Indexes)
Setting up Orders (Regular, Odd Lots, on Best price, Cover order, Stop Loss, etc.)
Managing portfolios and Margins
The salient merit of Intraday trading in F&O is the leverage it gives the trader with square-off trading, limiting the risk downside.
Intraday Square Off Time in India
With standard Intraday Trading time in India extending up to 3.15 pm, brokers have retained the discretion to square off open positions in case of intraday trades if left open by traders a little ahead. This rule also spans the failure of settlements and margin shortfalls if any such obligations are missed. So, at the most, the intraday square off time mandated by the broker ends by 3 pm (latest, by 3.10 pm). This designated time is mentioned in the Broker-Client contract to prevent the need to reach out to the trader with just 15 minutes of trading time left. The broker's auto square-off transaction could be profitable or loss-making depending on the ongoing market trend. This is a key Risk management practice in the trader's interests and maintaining market stability.
How to Square Off the Position
When the trader can find a good exit price level and reverses his position manually or by app-based cover order, which gets auto executed, within Intraday timing. A long position is then sold off for the same value date, and a short sale is covered by purchase to square off in the Stock market.
When the trader cannot find profitable target prices and waits way beyond the cut-off time in the evening (say 3 pm) and allows the broker where his trading account is parked, the risk is managed, and close the position is at the end of the day, by squaring off.
Most intraday traders keep meticulous position sheets and start preparing for the day to end well in time by squaring their books. There is only a rare chance of missing or miscalculating an open position with app-based trading because the software can reflect the trader's position book in real-time.
What are Intraday Square Off Charges
Often, the trader is unable to reverse his open position, even after setting an exit price, due to a static or sideways trending market. A range-bound market may lead to non-triggering of stop-loss as well. With the impending day-end cut-off time, the broker is forced to close the position at the existing market's best price on behalf of the trader. From the trader's point of view, this is not a desirable action and is a distress buy/sell. The broker levies penalty charges in the account referred to as intraday auto square off charges. This payment is a flat fee, over and above the P&L that accrues to the trader due to the non-closure of a position. This fee is levied every time auto square off takes place. Thus, intraday traders' neglect of open positions is a costly affair to avoid.
On the subject of charges, the recent SEBI tightening of peak margin for Intraday traders has blunted the derivative trade leverages, as against the end of day margin, before 2020. While making capital market trades safer has also made the cost of trading higher.Hence, what is squared off in intraday relates to specific time norms which govern Intraday trading time in India and need to be strictly adhered to by the trader.
What is MIS Order?