To succeed as a day trader, it is important to know how to pick stocks for intraday trading. Often people are unable to make profits because they fail to select appropriate stocks to trade during the day.
Tips to Choose the Right Intraday Trading Stocks:
- Trade Only in Liquid Stocks
- Stay Away from Volatile Stocks
- Trade in Good Correlation Stocks
- Follow the Market Trend before deciding the Right Stock
- Pick the Stock you are most confident in after Research
Trade Only in Liquid Stocks:
Liquidity is the most important intraday trading tip while choosing the right stocks to trade during the day. Liquid stocks have huge trading volumes whereby larger quantities can be purchased and sold without significantly affecting the price. Generally, lesser liquid stocks do not provide traders the opportunity to purchase and sell larger quantities due to lack of too many buyers. Some traders may argue that illiquid stocks offer bigger opportunities with rapid price modifications. However, statistics show that volatile stocks show greater movements in a short period of time. Thus, most of the possible gains dissipate while the downside risk still looms. Nonetheless, the liquidity of the stocks depends on the quality of the trades placed by the traders. For example, a volume of 50,000 to 75,000 shares is sufficient if the trade is for 50 or 100 Rs; however, if the volume is few hundreds or thousands, volume requirements significantly become larger.
Stay Away from Volatile Stocks:
It is commonly noticed that a low daily volume of traded stocks or those where some huge news is expected move in an unpredictable way. Sometimes, the stock may show volatility even after the announcement of the big news. Traders are recommended to avoid intraday trading in such stocks. A few volatile stocks are in the mid-size segment while most stocks traded in the low-cap categories like S, T, and Z are highly chaotic. In addition to being volatile, these stocks have low daily volumes, making them illiquid.
Trade in Good Correlation Stocks:
An intraday tip for choosing the right stock is to opt for those that have a higher correlation with major sectors and indices. This means when the index or the sector sees an upward movement, the stock price also increases. Stocks that move according to the sentiment of the group are reliable and often follow the expected movement of the sector. For example, strengthening of the Indian Rupee against the Dollar will generally affect all information technology companies dependent on the US markets. A stronger rupee implies lower earnings for the IT companies and weakening rupee will result in higher export incomes for these companies.
Follow the Trend:
One of the most important intraday trading tips is to remember that moving with the trend is always beneficial. During a bull run in the stock market, traders must try to identify stocks that can potentially rise. On the other hand, during the bear run, finding stocks that are likely to decline is advisable.
Pick after Research:
Undertaking quality research is one of the most vital intraday tips that traders must always remember. Unfortunately, most day traders avoid doing their research. Identifying the index and then finding sectors that are of interest is recommended. The next step is to create a list of several stocks with these sectors. Traders need not necessarily include sector leaders, but rather identify stocks that are liquid. Technical analysis and determining the support and resistance levels along with studying the fundamentals of these stocks will help traders find the right stocks to profit through intraday / day trading.
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Intraday trading is all about initiating and closing out your trades on the same day. For example if you buy 500 shares of Reliance in the morning at Rs.920 and sell it by evening at Rs.928, then you can book a profit of Rs.4000 (500×8) intraday. This trade does not result in any delivery as your net position at the end of the day is zero. You can also sell the stock in the morning and buy it back in the evening if you believe that the stock is likely to go down. In fact, if you want to short sell stocks (without delivery), then the only way you can do it in rolling settlements mode is intraday.
The most important step for an intraday trader is selecting the stocks to trade intraday. You need stocks that can give movement and at the same time are predictable. Here are 6 such factors you should consider when you select stocks for intraday trading.
Is the stock liquid enough?
Market liquidity is the most important consideration when looking at a stock for intraday trading. After all, you do not want to enter into a position and they worry about how you are going to exit the same. This problem normally exists in small stocks and more of the F&O stocks and the higher end of mid cap stocks are normally quite liquid. But how do you measure liquidity. One the basic measures of liquidity is to view daily volumes as a proportion of market capitalization.
Liquidity = Average daily volumes / Market capitalization
While there are no hard and fast rules, a minimum liquidity ratio of 10% should be the benchmark to consider a stock for intraday trading.
Can you buy or sell the stock with low impact cost?
What do we understand by low impact cost? It is the impact on the stock price when you place a large buy or sell order on the stock. When impact cost is high, the risk of intraday becomes too high and hence such stocks should be avoided for intraday trading. High impact cost means that the price at which you will get the stock could be unfavourable to you in case of large orders. This will change the economics of your intraday trade. Prefer stocks that have low impact cost, which is normally another proxy for liquidity.
Is the stock widely owned?
You can check out these details in the ownership pattern of the stock which is available on the websites of the exchange. You can also get cues from the trading pattern of the stock. Stocks that are not widely owned will be more volatile and will also hit circuit filters easily. That is because a handful of market operators will be able to corner these stocks quite easily if they are not widely owned. As an intraday trader, always prefer stocks that are liquid and widely owned. That will reduce your risk substantially.
Does the stock sustain narrow tick spreads?
This is again an extension of the liquidity and the impact cost argument. But since we are talking about an intraday trader, the tick becomes very important. The tick is the minimum gap between two orders. There must be enough volumes on each tick to qualify for an intraday trade. You do not want to place an order and realize that your order execution has actually happened several ticks away. In intraday trades, you try to capitalize trends and so you normally place market orders. Hence the tick gap becomes a key consideration for intraday stock selection. Smaller the tick gap, the better it is for you.
Does it show clear and decipherable chart patterns?
As intraday trader, you need to rely heavily on technical charts. Of course, you must develop the capacity to read charts on your own. But above all, ensure that the stock depicts clear chart patterns. It is not possible to trade in a stock that does not have sufficient history or which does not depict a clear pattern. Only with a long history, you can decipher patterns and then trade for a repeat of these patterns.
What is the price sensitivity to news flows?
An intraday trader, typically, relies on two factors to trade viz. chart patterns and sensitivity to news flows. You cannot trade intraday in a stock that does not react to news. Basically, you are look at stocks that are extremely sensitive to news. That is why your strategy of buying on expectations and selling on announcements can actually work in practice.
Intraday trading is as much about getting the stock list right as it is about discipline. The key here is to keep your stock universe limited so that you can do justice tracking these stocks in terms of fundamentals, technicals and news flows.
One of the big questions that come to every intraday trader’s mind every single day is to find the right stock for intraday trading. After all, the key to successful trading is the right selection of stocks. There are a number of factors that should be taken into consideration at the time of stock selection. There are so many listed shares but it isn’t necessary that they can be chosen for intraday trading. Take a look at a few tips mentioned below which highlight on
how to pick stocks for intraday trading? :
One of the main criteria while intraday trading is the volume of the stocks. The total number of shares that are traded in a particular market at a given time reflect volume. It is mostly recommended to purchase stocks that are high in volume.
Stocks of the day
Depending on good news, a few stocks are expected to perform well. Such stocks are anticipated to move in either direction with good volume. These shares can be used for intraday trading.
Study the movement of stocks that are constantly closing in negative or positive for the previous one week. An analysis of this movement will help you in selecting the stocks for intraday trading.
Some of the stocks to watch out for are those that have broken resistance levels and which move in an upward direction. Such stocks are one of the favourite choices.
Trading in few stocklists
A few intraday traders involve in trading only in particular shares. This is because these traders engage in detailed study of share movement. This is one of the main intraday strategies that are followed by traders.
Top gainers and losers
While some shares come under top gainers, others come under top losers. Such shares may provide fairly good movements. However, keep a close watch on these them in order to begin trading.