What Is Intraday Return?
The intraday return is one of the two components of the total daily return generated by a stock. Intraday return measures the return generated by a stock during regular trading hours, based on its price change from the opening of a trading day to its close. Intraday return and overnight return together constitute the total daily return from a stock, which is based on the price change of a stock from the close of one trading day to the close of the next trading day. It is also called daytime return.
- Intraday trading occurs during regular stock market exchange hours.
- Returns that include the overnight period are called daily returns.
- Intraday trading can also be called day trading.
- High-frequency trading by algorithms has crowded the intraday trading space.
- Most brokerages will post daily returns, not just intraday returns.
Understanding Intraday Return
Academic research reveals that intraday return is a bigger contributor to total return than an overnight return. It also suggests that there is a slight negative correlation between overnight return and intraday return.
Intraday return is of particular importance for day traders, who use daytime gyrations in stocks and markets to make trading profits, and rarely leave positions open overnight. Day trading strategies are not as commonplace for regular investors as they were before the 2008-2009 recession.
Uses of Intraday Returns
Technical analysis and investment techniques based on technical analysis often use intraday price and volume data to derive strategies that look to exploit patterns in security momentum, moving averages, and unique cycles. Empirical studies are mixed on the effectiveness of technical strategies, but behavioral economics and advanced quantitative methods are shedding light on new opportunities.
Intraday security returns are also instrumental to the daily functions underlying margin accounts offered by brokerages and the exchange of collateral between international commercial, and financial entities. In the case of margin extended by a brokerage firm, if intraday returns are substantial, they may trigger a margin call to a client(s). To limit counterparty credit risk, commercial banks exchange collateral daily—based on the price behavior of underlying securities.
Intraday trading, most commonly referred to as day trading, is trading that is focused on the short-term harvesting of profit within a one-day trading cycle. Pattern day traders (PDTs) are characterized by a certain number of day trades in a specified period of time, and these are typically the traders who will base their strategy on agile buy-and-sell strategies. They are not so many investors as they are traders, aiming to profit off momentary changes in a stock price.
Intraday trading is usually based on two sets of indicators: technical indicators and psychological indicators. Traders will look for stock with high volatility to ensure there is adequate price movement, as well as stocks or securities that are highly liquid. The last thing a day trader wants is to be "stuck" in a trade because there is no party on the other end willing to make the trade.
The Securities and Exchange Commission (SEC) will classify you as a pattern day trader if you make more than four day-trades in a five business day period while using a margin account.
Intraday Returns vs. Overnight Returns
There is a clear distinction between these two types of returns, and they are naturally delineated by the style of investing that is being used. Day traders will trade during the day. If they open and close a position within market hours, and that position made 1%, they have an intraday return of 1%.
If a long-term investor purchased the same stock but didn't sell it, their return would be slightly different. The stock will have appreciated 1% during the day. But, after market close, the company that issued the stock posted surprisingly good revenue, and the stock jumped 5% after-hours. The stock was flat the next morning in pre-market. That investor would have seen a 1% intraday, and 5% overnight return. If they arrive at the same time the next day and the stock hasn't changed since the night before, their daily return would be 6%.
How to Calculate Daily Returns
Almost all brokerages will present a daily return, thankfully negating the need to calculate it for yourself. However, it's still worth knowing how to do it, and the formula is simple. To calculate a daily return, you subtract the starting price from the closing price. Once you have that, you simply multiply by the number of shares you own.
To illustrate, let's say you own 100 shares of XYZ stock. The day opens at $20 and closes at $25. This is a $5 positive difference. Multiply the $5 difference by the 100 shares you own, for a daily return of $500.
Some investors will prefer to work in percentages rather than dollar amounts. This is only slightly more complicated. You perform the same first step and arrive at a $5 gain per share for the day. You then divide by the opening price of $25, leaving you with 0.2. Multiply by 100 to arrive at your daily return of 20%.
What Is Considered a Good Intraday Return?
A good intraday return will depend on your individual investment strategy and tolerance for risk. Each day is different and traders know that psychologically, it is much more advantageous to calculate their profits either weekly or monthly. If you are a new trader, any profit at all is considered exceptional.
Is Intraday Trading Profitable?
Intraday trading can be profitable, and it can also end in serious losses. Like any other investment strategy, risk management is paramount and even more so in intraday trading, as trades are usually highly leveraged and do not have the benefit of being able to handle a move in the wrong direction because of an extended time horizon that smooths out momentary downtrends.
How Is Daily Return Calculated?
Daily return is calculated by subtracting the opening price from the closing price. If you are calculating for a per-share gain, you simply multiply the result by your share amount. If you are calculating for percentages, you divide by the opening price, then multiply by 100.
The Bottom Line
Intraday returns are the returns from market open to market close. This is in contrast to overnight returns, which occur from market close to market open. Intraday trading is commonly called day trading and although there can be significant profit potential, careful adherence to risk is essential.