How to Choose Best Stock For Intraday Trading

Topics Covered

• Focus on liquid stocks only
• Avoid volatile stocks
• Check the correlation between stocks that you trade
• Trade on the side of momentum
• Do your own chart research before intraday trading

Intraday trading is all about creating and closing out positions in the stock market on the same day. You can buy in the morning and sell before close of trade, or you can sell in the morning and then buy it back before the end of the day. In fact, since Indian equity markets operate on rolling settlement, the only way to short sell stocks is to do it intraday. When it comes to intraday trading, it is more about risk and less about returns. If you select the right stocks and manage the risk of the trade properly, then returns will follow automatically. However, since you need to get out of an intraday position on the same day, you need to be extremely careful of the stocks you choose. Here are 5 pointers to choosing stocks for intraday trading

Focus on liquid stocks only

The first rule of online trading stock selection is that you need to focus on liquid stocks only. What do you mean by liquid stocks? There are two conditions for a stock to qualify as a liquid stock. Firstly, a stock is liquid if you can buy sufficient quantities of the stock without impacting the price. That means; the impact cost of the stock must be quite low. Secondly, the basic risk must be the lowest possible. For example, if the tick is 5 paisa then the volumes must be available at the nearest tick and the intraday trader must not be forced to accept a higher buy price or lower sell price for the same of volumes. By focusing on liquid stocks you substantially reduce your intraday trading risk.

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Avoid volatile stocks

When you trade intraday, it is essential to always trade with strict stop losses. In fact, stop losses are the primary weapon of an intraday trader. When stocks are volatile, then stop losses either tend to get hit frequently or the intraday trader is forced to keep the stop loss wide enough to avoid triggering the stop loss. This negatively impacts the risk-return trade-off of the intraday trader. Always focus on stocks that can give predictable price movement with limited volatility.

Check the correlation between stocks that you trade

What do we understand by correlated stocks? These are stocks where the price movement is closely related to one another. For example, Lupin and Sun Pharma! Normally, when you trade intraday, it is always advisable to limit yourself to a handful of stocks as tracking them becomes a lot simpler. In fact, if you select stocks that are highly correlated with one another, then you can initiate multiple trades with the same view crystallized by you. That is the problem with stocks with low correlation. You need to create a fresh view for each trade, which is not really practical. The best you can do is to create a view and then zero in on high correlation stocks to capitalize on the trend.

Trade on the side of momentum

This is, perhaps, one of the most important rules for stock selection in intraday trading. What do we understand by momentum? When there is a positive announcement about a particular sector, then the momentum is in favour of the sector. In that case, your approach should be to buy on every dip. On the other hand, if the momentum is weak then you should sell on every rise. Once the momentum is identified in the stock or the index then always trade on the side of momentum! Contrarian investing may work well in fundamental and long-term investing. For intraday trading, the trend is your friend

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Do your own chart research before intraday trading

If you want to be a successful intraday trader, then you must first learn to become a self-trader. Don’t rely too much on tips and trading advice from the so-called experts. You can surely get inputs but you must get very comfortable with charts. When you select stocks for intraday trading, your focus must be on stocks where you are able to read the charts. You must be able to identify the supports and resistance levels of the stock, mark the breakouts above the resistance line or below the support line etc. You must also be able to use the charts to identify shifts in momentum, gauge when the price charts cut through the DMA chart and also identify overbought and oversold zones. Only trade on those stocks where you are comfortable applying the entire gamut of charts and analytics to your intraday trading.