In this blog we will talk about that question that people
asked frequently. How to select stocks for intraday trading?
But before that, let’s understand what intraday
trading is. Intraday trading is about buying and selling a security on the same
day in an attempt to book profits. It is a kind of a market order where you
don’t plan to take delivery or fulfil it. In other words, if you place an
intraday order to buy shares, you don’t want to buy them but are hoping for the
share price to increase and sell them before the end of the trading day. These
orders also allow you to sell shares first even if you don’t own them and buy
them during the day to square off the transaction.
In intraday trading, success relies on choosing the
right stocks since you only have a few hours before squaring off your position.
Hence, picking the right stock is crucial. Let’s understand a few suggestions
to help you in sharpening stock selection strategy. Before we talk about how to
select a stock for intraday, it is important to note a few points. Like as a
day-trader you don’t have the luxury of holding on to the stock. A day-trader's
one wrong decision can lead to heavy losses.
Typically, if you want to buy and sell any
commodity within one day, it should have certain features like -
1. High demand or liquidity
2. Price fluctuations so that you can buy low and
sell high (volatility)
3. Market trends
4. Sector trends
5. Momentum of stocks
6. Technical Analysis
Here is an example to help understand this. Let’s
say that you want to buy and sell onions for profit.
You will succeed if there is a constant trade
happening in onions throughout the day. That is, prices are going up and down
based on the demand and supply of the commodity onions. Also, there should be
enough data to support the fact that the overall market is doing good, the
business and the onion sector are booming. Further, recent momentum should be
in favour of trading in onions.
If these factors are in place, you can be in a good
position to earn profits. The same approach applies in selecting stocks for
intraday trading. Here are the things to consider before selecting stocks for
Intraday.
1. Liquidity.
As explained in the example above, the liquidity of
the said stock is to be high to ensure that you can buy and sell stocks at any
point. Another important aspect of buying stocks with high liquidity is that
they usually have large volumes. Hence, you can buy and sell large quantities
without impacting the stock price. While choosing highly liquid stocks, ensure
that you assess the liquidity at different price levels. While some stocks can
have high liquidity at low prices, the volumes can drop drastically beyond a certain
level. Understanding this can help you buy them at the right time.
2. Volatility which should
be from medium to high.
Day traders benefit only when the price moves up or
down as per their expectations. Sometimes traders can book losses if the price
moves against expectations. If the stock price is volatile, then they can place
more intraday orders and benefit from favourable price movements. But note
that, buying highly volatile stocks can be counterproductive if the drop or
rise is too steep. While there is no rule, most intraday traders prefer stocks
that tend to move between 3-5% on either side.
3. Market trends.
Based on the economic,
political, social, and other factors, markets tend to move either upward or
downward. Stocks have a positive or negative correlation with the markets. This
means that if the markets rise, the stock prices can rise or fall respectively.
Hence, keeping this correlation in mind is
important while buying stocks for intraday trades.
4.
Sector trends.
The market can be divided into various sectors
including technology, pharmaceuticals, automobile, oil & gas, FMCG, and
banking. As an intraday trader, it is important to keep abreast of the
performance of all sectors in the economy. If you identify any sector or
sectors that have been consolidating over months and are ready to break out, then
you can look for companies from the said sector to invest in. Also, if you
identify any stocks that have made substantial gains but you missed
capitalizing on the rise, then you can look at peer stocks from the same sector
that is in the possible-breakout area.
5. Momentum of stocks.
The speed of change in the price of a stock over
time is known as the momentum of the stock. This can help you determine the
strength of an upward or downward trend in the price of the stock. If the stock
price moves with the strength of the momentum, then the said stock is called a
momentum stock. Such stocks are used by day traders for going long or going
short and earning a profit.
Now, let’s move to the next point which is
technical analysis. Apart from the momentum of stocks, various strategies can
help you conduct the technical analysis of the stock to identify buy or sell
signals. You can look at stocks that display gaps in the stock prices in either
direction. These gaps can be earning opportunities for day traders.
You can also use technical analysis to find stocks
that are breaking their support and resistance levels. So, these were the
points that will be helpful for you while selecting stocks for intraday
trading. Remember, buying the right stocks is important to generate profits in
intraday trading. While the above pointers can help you find them, with time,
you will discover ways in which stock selection works best for you. With all
these points, you should stay objective and data-driven and avoid
emotion-driven decisions to make money via intraday trading.
We hope you liked today’s blog so don't forget to Comment
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Also, we don't recommend any stock, and all of
these are for educational purposes.
Bye-bye. Take care. Keep calm and invest on.