Rules for Selecting Stock for Intraday Trading

Intraday trading has become a popular choice among market participants. With the right techniques, intraday trading can be a profitable endeavour. The tools and techniques for intraday trading are fundamentally different from long-term investing. Since the margin of error is very low, the stock selection has to be accurate. All the positions in an intraday trade have to be mandatorily squared off before the closure of the markets. It guides the stock selection process in intraday trading. Here are some of the stock selection rules for intraday trading.

Choose liquid stocks

The biggest concern for a day trader should be the liquidity of a stock. The stock has to be bought and sold within the same day and so investing in a liquid stock is extremely important. A stock with high volumes can be bought and sold in large quantities without affecting the price. Adequate liquidity provides comfort that the stock can be bought or sold whenever the need arises. This helps in grabbing any potential gains that arise from large price movements in a day.

Avoid volatile stocks

The profitability of intraday trades is based on stock price movements in a day. But one should avoid investing in extremely volatile stocks to gain from the movement. It may seem enticing, but the result may not be desirable. Intraday trades are placed with a stop loss and investing in a volatile stock will trigger the stop loss and automatically cut the active position.

Invest in correlated stocks

There are many intraday stock selection strategies, but some are only suitable for professionals. One should always start with simple trading strategies. One of the simplest intraday trading strategies is to invest in stocks that are highly correlated to a sector or an index. The performance of the broad sector or the index gives a clear idea of the trend and profiteering from the investment becomes relatively easy. One can check the performance of a specific sector from the website of NSE and select a stock which shows a clear upward or downward trend. Since the stock price movement is co-related to the sector, it is easy to trade with the trend of the market.

Follow market trend

The market trend often determines the movement of specific stocks. An easy way to maximise profits from intraday trading is to follow the market trend. Choose a stock that has the potential to rise when the market is in a bullish run and vice versa.

Opt for brokers that offer charting tools

The nature of intraday trading has changed drastically in the past few years. Advanced charting tools, research and analytics are used extensively by intraday traders. These help in identifying major support and resistance levels and past performance of the stock. Not every stockbroker provides the tools required for intraday trading. Open trading account with brokers that give charting tools and access to quality research as a part of the package. To increase your efficiency, open a demat account with the same stockbroker.

Look for transparent companies

Always trade in stocks of companies that make sufficient information available to the market. Decision making becomes easier when you factor in all the available information. If crucial information is hidden, you may take the wrong position, which could lead to losses. Only companies that are transparent and have a history of keeping promises should be chosen for intraday trading. Stable management is another factor that should be taken into consideration before choosing stock for intraday trading.

Choose stocks with presence in the derivatives segment

Opt for companies that are also traded in the derivatives market. Due to presence in multiple segments, the company is analysed extensively, which makes taking an informed decision easier.

Trade in news-sensitive stocks

A popular intraday stock selection strategy is to choose scrips that are sensitive to news. These stocks generally react to any positive or negative developments reported in the media. Once you get an idea of the movements triggered by news, taking positions becomes simple. But one should be cautious while trading in stocks that react to the news. Sometimes these stocks move in the opposite direction to the news. The stock price may fall even if the news is positive. To mitigate the risks of an unexpected movement, you should always trade with a stop loss in place.

Conclusion

Selection of the right stock is one of the most important steps in intraday trading. However, it cannot be learned in a day. There are various parameters and strategies for selecting a stock. Opting for the right stockbroker can be of help as access to quality research and analytics can simplify the process. Opt for an IIFL demat and trading account and get access to suitable charting tools and research reports. IIFL demat and trading account’s reliable technological backbone ensures quick order execution, which makes intraday trading a seamless affair.

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