Eight Rules for Selecting Stocks for Intraday Trading
Intraday trading has become a popular choice among new-age investors who want to make quick profits without waiting for a long time. With the right techniques, intraday trading can be a profitable endeavour. However, the tools and techniques for intraday trading are fundamentally different from long-term investing. Intraday trading requires extensive market knowledge, and as the trades are made within hours, the margin of error is very low. Hence, the stock selection must be accurate.
Here are some of the stock selection rules for intraday trading that will allow you to pick stocks for Intraday trading successfully:
1. Choose liquid stocks
The biggest concern for a day trader in the stock trading app is the liquidity of a stock. As the stock has to be bought and sold within the same day, investing in a liquid stock is extremely important. 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. You should look for stocks with high volumes as they can be bought and sold in large quantities without affecting the price.
2. Avoid volatile stocks
The profitability of intraday trades is based on stock price movements within the day. But one should avoid investing in extremely volatile stocks as the price movement may turn negative. Investing in volatile stocks may seem enticing, but the result may not be desirable. You should always execute intraday trades by using a stop loss. If the price goes down and reaches your stop-loss price, it will trigger the stop loss and automatically cut the active position.
3. Invest in correlated stocks
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 market trend, and earning good returns from the investment becomes relatively easy. One can check the performance of a specific sector from the NSE website and select a stock that shows a clear upward or downward trend. Since the stock price movement is co-related to the sector, it is easy to trade within the current market trend.
4. 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 current market trend. Choose a stock that has the potential to rise when the market is in a bullish run and vice versa.
5. Opt for brokers that offer charting tools
Advanced charting tools, research and analytics, are used extensively by intraday traders. These tools help in identifying major support and resistance levels and past performance of the stock. Not every stockbroker provides the tools required for intraday trading. Hence, you should look to Open a trading account with a stockbroker that provides 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.
6. Look for transparent companies
It is always wise to choose stocks of companies that make sufficient information available about their business operations 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 have a transparent business process should be chosen for intraday trading. Stable management is another factor that should be considered before choosing stock for intraday trading.
7. Choose stocks with a presence in the derivatives segment
Opt for companies that are also traded in the derivatives market. As the company is present in multiple investment segments, the research done on the stock is extensive. This can allow you to analyse the stock better and make an informed decision.
8. Trade 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. However, you should be cautious while trading in stocks that react heavily 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
The right stock selection is one of the most important steps in intraday trading. However, learning to pick ideal stocks is not something that you can learn quickly, as there are various parameters and strategies for selecting a stock. Opting for the right stockbroker help gain 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.