Intraday trading is about buying and selling a security on the same day with an attempt to book profits. It is a kind of a market order where you don’t plan to take delivery or fulfill 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 heavily on choosing the right stocks since you only have a few hours before squaring off your position. Hence, picking the right stock is crucial. In this article, we will endeavour to share some essential tips to help you hone your stock selection strategy.
Please note, every investor has their own profile and investment objectives. You can consider this blog as a starting point to develop your strategies further. Please consider your own risk appetite and conduct the necessary due diligence before selecting a stock.
Before we talk about how to pick a stock, it is important to note that as a day trader, since you don’t have the luxury of taking delivery and holding on to the stock, 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:
- High demand (liquidity)
- Price fluctuations so that you can buy low and sell high (volatility)
- Market trends
- Sector trends
- Momentum stocks
- 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 with prices going up and down based on the demand and supply of the commodity. Also, there should be enough data to support the fact that the overall market is doing good business and the onion sector is especially booming. Further, in recent days, the momentum should be in favor of trading in onions.
If these factors are in place, you can be in a good position to earn profits. The same approach applies to choose stocks for intraday trading. Here are the things to consider before selecting stocks for Intraday:-
As explained in the example above, the liquidity of the said stock 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.
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 favorable price movements. Having said this, buying stocks that are highly volatile can be counterproductive if the drop/rise is too steep. While there is no rule, most intraday traders prefer stocks that tend to move between 3-5% either side.
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.
The market can be divided into various sectors like technology, pharmaceuticals, automobile, oil & gas, FMCG, banking, etc. As an intraday trader, it is important to keep abreast of the performance of all sectors in the economy. If you identify any sector(s) 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.
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 (upward trend) or going short (downward trend) and earning a profit.
Apart from the momentum of stocks, there are various strategies that can help you conduct the technical analysis of 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.
Remember, buying the right stocks is important to generate profits in intraday trading. While the tips mentioned above can help you find them, with time, you will discover ways in which stock selection works best for you. Ensure that you stay objective and data-driven and avoid emotion-driven decisions to make money via intraday trading.