One of the first predicaments that you as an intraday trader will face is selecting the right stock to trade on that day. Having to choose one out of the thousands of stocks listed on the market is often a complication that plagues most intraday traders. After all, you only have a few hours to square off your positions and secure profits, the pressure to choose the right stock is always present. Thus, in this article, we will uncover some of the best approaches when it comes to picking a stock for intraday trading. But before we begin, let’s quickly revisit some fundamentals, just so we are on the same page.
- Intraday trading: It is a style of trading where traders open and close their positions on the same day, the aim being, to capitalize on the fluctuations in market prices during the day.
- Intraday time frame: The timings for intraday trading in the equity segment is from 9:15 am to 3:30 pm from Monday to Friday, meaning that a trade is classified as an intraday trade if a trader opens and closes the positions within this time frame.
- Intraday charges: With CubePlus, you can trade with confidence, knowing that our charges are both competitive and transparent. Here are the charges for intraday trading with CubePlus:
- 0.05% per order or Rs. 20 per order, whichever is lower.
-Statutory Charges (Equity Intraday):
- STT/CTT at 0.025% on the sell side.
-Additional Charges:
- 18% GST on brokerage, exchange transaction charges, and SEBI fees.
Here's a video by TradeJini on why 99% of Traders fail in the market:
Best Strategies to Select Intraday Stocks.
- Know your playground:
Before picking a stock, it is crucial to get an overall idea about the market sentiments for the day. This involves understanding the indicators such as trending sectors, breaking news, investor sentiment, and whether the market is bullish/bearish. This is important as this reveals crucial information about the stocks, allowing for better forecasting and capitalizing on the opportunities presented on that day.
One can gauge the market by staying updated on the latest news, tracking economic indicators, and reviewing market reports. Watch for geopolitical events, central bank decisions, and earnings announcements, as these can influence market movements. Also, keep an eye on social media and financial news for real-time insights.
This will help you assess the market conditions and the sector/stock which you should most likely focus on, for the day.
- Liquidity is your best friend:
Liquidity is the ease at which a stock can be bought and sold and this largely depends on the supply and demand for the stock in question.
High trading volumes mean it's easier to enter and exit positions smoothly, even for larger trades, with minimal risk of slippage due to a greater number of buyers and sellers. On the other hand, stocks with low liquidity can be problematic. Limited buyers and sellers can make it difficult to open or close positions at your desired price, often leading to less favorable execution.
Learn About: Expiration Date in a Futures Contract: Significance, Factors to Consider & Managing Risk
Indicators That Help to Identify the Liquidity of Stock
- High trading volumes:
Trading volume refers to the number of shares being bought and sold at a given point in time. A higher trading volume simply means that there is a high supply and demand for that particular stock, therefore indicating positive liquidity.
- The bid-ask spread:
The bid-ask spread signifies the difference between the bid price and the ask price. Look at the difference between the highest price buyers are willing to pay (bid) and the lowest price sellers will accept (ask). If this difference is small, it means there are lots of buyers and sellers in the market. A small spread suggests the stock is liquid, meaning you can easily buy or sell it without affecting the price too much.
- High Trading Volume and Large Float:
When a stock has a high float, it means there are many shares available for trading. A high trading volume with a large float indicates that lots of shares are being bought and sold. This usually means the stock is liquid, as there are plenty of opportunities to trade without impacting the price too much.
A low liquidity and trading volume is like trying to get out of a crowded elevator. You might encounter chances of slippage, difficulty in executing trades, and a higher risk while trying to square off. Therefore look out for these signs and select stocks that have good liquidity and trading volume.
- Embrace volatility:
Volatility is often perceived negatively and is associated with risk and uncertainty. But it is important to understand that volatility, that is, the fluctuations in the current market prices (CMP) of a stock is what makes or breaks the deal for intraday traders. This again depends on the risk tolerance of individual traders but the goal of trading intraday is betting on short-term price fluctuations to secure profits which volatility helps actualize.
It is essential to find stocks with just the right amount of volatility that ensures decent gains at a tolerable risk. Stocks with low volatility have negligible movements in prices, thus, making it hard to secure adequate profits. Inversely, stocks with high volatility have erratic movement in prices and carry significant risk, however, also provide opportunities to make a solid profit.
Investors are advised to gauge the risk and pick a stock with the right amount of volatility that is deemed fit to their risk tolerance for intraday trading. Generally, a 3-5% movement in the stock price on either side is seen as a preferable stock for trading intraday by most traders.
- Risk Management:
Risks are an inherent element of trading and one can always minimize it but never eliminate it. So is the case when picking stocks to trade intraday. Sometimes, the stocks you picked after a long research tend to move against you. Sometimes, the stock that you neglected has a massive rise seemingly out of nowhere.
Oftentimes, the volatility or the liquidity that you predicted may backfire and lead to bad trades. But this is just part of the game and one must not feel discouraged.
Learn to embrace this nature of the market and do not make any impulsive decisions. Always find ways to minimize risks such as setting an entry and exit point, using a stop loss, and sticking to your trading plan.
- The Technical Toolkit: charts and indicators:
Mastering key technical indicators is crucial for successful intraday trading. While the array of available tools might seem overwhelming, focusing on a few core indicators can provide significant insights into stock price movements and help in making informed trading decisions.
Moving averages are one of the most fundamental tools. They smooth out price data to reveal the underlying trend, helping traders identify potential buy and sell signals. The Relative Strength Index (RSI) measures the speed and change of price movements, indicating whether a stock is overbought or oversold, which can guide entry and exit points. Meanwhile, the Moving Average Convergence Divergence (MACD) helps traders spot changes in the strength, direction, momentum, and duration of a trend.
Incorporating these indicators into your trading strategy can enhance your ability to identify stocks with the potential for profitable intraday moves. Understanding how to interpret and use these tools effectively can be the difference between a successful trade and a missed opportunity.
- Go with the flow:
One of the simplest yet effective strategies in picking a good stock to trade intraday is to find a stock with good momentum. Momentum here, refers to the speed at which the price of the stock is changing against time. Simply said, how quick a stock is gaining or losing its price. Following the upward momentum of a stock is perhaps the simplest way to make potential profits.
It is relatively easy to identify too. For instance, there exists a pre-market that shows the top gainers and top losers based on the opening price of a stock at around 9:08 am, before the market officially opens at 9:15 am.
A candlestick chart can be useful for identifying stocks that show strong momentum shortly after the market opens. For instance, if the opening price of a stock is also the lowest price on the first candlestick, it indicates upward momentum in the first 5 minutes of trading. This suggests a higher likelihood of the stock continuing to rise throughout the day. Essentially, when the opening price is also the day's lowest, the stock has strong upward momentum with a higher chance of sustained gains.
Lastly, one can also look at stocks that have hit their 52-week highs. If a stock has broken out of its 52-week high, it suggests that the stock is on a high momentum and there is a chance of further upward movement of the price. Combining this with a moving average indicator will also result in better stock selection with high momentum.
With these 5 strategies, we hope that you were able to narrow down your picks for trading intraday. But after the main course, comes the dessert. So we will also provide a few tips and tricks that will help you out while trading intraday.
- Despite following the above strategies and researching, sometimes you may still fail to find the perfect stock to trade and it is totally fine. Do not make any impulsive decisions and remain patient.
- If you are new to intraday trading, it is advised that you start with a small capital until you get accustomed to the aspects of intraday trading. Remember to remain calm and disciplined, even when the trades go against you.
- Always make sure you have an entry-level and target price set. This will ensure you do not sell too early and miss out on profits or sell too late and make losses.
- Ensure that you have set a stop loss at your desired price to prevent losses due to sudden erratic movements. Always have a plan and a backup plan too.
- Timing is crucial in intraday trading. It is a common practice to avoid trading during the first and last hours of market activity, as these periods are often marked by heightened volatility. Instead, the optimal trading window is between 10:15 a.m. and 2:30 p.m., when the market tends to be more stable.
- And lastly, always remember to square off your positions by the end of the trading day. Some intraday traders take the risk of holding onto their positions if the stock doesn't hit their target price, but this can expose you to overnight volatility, including sudden market crashes or unfavorable news. It’s essential to close out positions to avoid these unpredictable risks and protect your capital.
To Conclude
In conclusion, selecting the right stock for intraday trading can seem daunting at first, but by applying the strategies discussed, you can approach the process with greater confidence. Start by focusing on the key indicators, timing, and market conditions that influence stock movements. Remember, it's essential to begin small, practice regularly, and gradually hone your stock-picking skills as you gain more experience.
As a next step, consider testing your newfound knowledge with a simulated trading account to sharpen your skills without risk. Additionally, joining a community of traders can provide valuable insights and shared experiences to further enhance your learning journey.
And as always, Happy Trading with TradeJini!!!
Also Read: Arbitrage Trading: Definition, Types, Benefits, Challenges and How Does It Work
