What Kind of Stocks to Choose for Intraday Trading?

Doing intraday trading is one part of the story. The bigger question is how to pick stocks for intraday trading. Not all stocks would be eligible to trade intraday as you need stocks that are predictable yet responsive to news flows. There are several ways but there are some broad rules and parameters that you can follow. For example, you can combine stability, responsiveness, and patterns to decide how to select stocks for intraday.

The big challenge is to first prepare a universe of stocks for intraday trading. Your universe cannot be more than 50-60 highly liquid stocks. Even these many stocks are tough to track and trade so you need to zero in on the 10-12 best stocks for intraday trading. Now, when we say best stocks for intraday trading, it is not about the profits they could give but how reasonably possible it is to trade them profitably consistently.

How to choose stocks for intraday trading?

Let us now get to the practical aspect of how to choose stocks for intraday trading. The first step to zeroing in on the best stocks for intraday trading is by creating a trackable universe of stocks. You can use filters and screeners to zero in on these stocks. But remember that the ones you identify as the best stocks for intraday trading must meet your intraday trading criteria in almost all ways.

Let us start with some elementary steps to identify the best stocks for intraday trading scientifically and systematically.

  • The first rule is to always stick to the time-tested and liquid stocks universe. They will not enable easy execution but they also ensure that you don’t get caught up in spread risk or the risk of not being able to exit intraday.
  • One interesting way to identify the best stocks for intraday trading is to filter them on their movement. Look at both the rupee movements and the percent movement to get a clearer idea.
  • By being wary of stocks that are too closely correlated to the market as they almost become a replica of the.
  • It is best to look at stocks that have their own unique price movement patterns. They are normally the best stocks for intraday trading.
  • A stock may be volatile and look attractive but such unpredictable stories have their limitations. You may get into such stocks and then find yourself stuck without an exit route or the spread may be too large.
  • Avoid stocks that have limited free float and where the promoter holding is too high. These won’t qualify as the best stocks for intraday trading as they can be easily controlled by a clutch of traders and you need objective stocks.

Remember, that as an intraday trader your success begins with identifying the right stocks to trade in. Once you have identified such stocks, you can closely monitor and evaluate these further to identify trends. It is only when you can identify distinct trends that you can devise your entry and exit strategies.

So, let us quickly sum up the rules for stocks to qualify as the best stocks for intraday trading.

  1. The stocks must be liquid and must have a large volume of trading throughout the day. This means sufficient volumes and also thin spreads to reduce your spread risk.
  2. Yes, you need volatility and the volatility must be medium to high. However, the volatility cannot be extremely high or extremely low. Trends must be identifiable.
  3. Never try to beat the market with the stock intraday or beat the daily trend. A good intraday stock follows the broad trend and so should you.
  4. One criterion of best stocks for intraday trading is a stock that follows the group trends and indicators closely. An example is an IT stock that tags dollar strength.
  5. Don’t look for contrarian stocks in intraday trading. That is for long, long-term investors. Look for stocks that follow a pattern that can be explained and extrapolated.

Finally, let us look at the types of stocks that will typically fit your bill as the best stocks for intraday trading. Here are five types of stocks that will suit your intraday trading.

  • The first kind of stock is the trend stock that follows distinct trends that can be analyzed and extrapolated. Once you grasp this trend, you are good to trade intraday.
  • Upper breakout stocks are also good for intraday trading. You need to get in after they decisively break above the resistance and keep stopping loss below the resistance.
  • Lower breakdown stocks are also good for intraday trading. You need to sell them after they decisively break below the support and keep stop loss above the support.
  • An easy way to intraday trading is in herd stocks. For example, when chemicals are doing well, you can pick up any liquid chemical stock intraday and multiply the effect.
  • One way is to trade intraday on momentum. For example, stocks that are making new highs or 52-week highs have momentum in their favor and are good intraday picks.

Let us sum up the most important issue when it comes to picking the best stocks for intraday trading. The said stock must be liquid, show clear trends, have low impact costs, and must respond proactively to news flows. Above all, avoid stocks that are very closely held or closely owned. That is the starting point to select stocks for intraday trading.

How to start intraday trading?

You may get tired of listening to this ad nauseam but any trading, whether intraday or delivery, must begin with opening your trading account and Demat account. Remember, intraday trading does not result in delivery, so do you need a Demat account if you only intend to trade intraday. The answer is you do require as SEBI rules stipulate that no trading in equity in any form is permitted without having a Demat account linked to a trading account.

If you are a frequent and regular intraday trader, then it is best not to mix up your intraday trading with your regular delivery trading. Keep that account separate as it is easier for tax purposes and also for monitoring performance and profits. You can also sign up for the right tools in this case that will help you with intraday trading.

Here are some stepping stones for starting intraday trading. Before you commence intraday trading, spend some time examining daily charts so that you can familiarise yourself with the price patterns, trends, breakouts, etc. You have to be an analyst and trader. Various tools give technical support and most importantly keep abreast of the news flows.

What is the average price?

The concept of an average price is important as you don’t buy all stocks in one go. For example, if you buy 100 shares of RIL at Rs.2000, 200 shares at Rs.2050, and 300 shares at Rs.2100, what is your average price. Is it Rs.2050, which is the average of the 3 prices? No, it will be the weighted average as you bought different quantities so you must weigh these quantities by the prices. Here is how you get the average price.

Buy Price Buy Quantity By Value Quantity Weight Wt. Price
100 Rs.2,000 Rs.200,000 0.1667 333.4
200 Rs.2,050 Rs.410,000 0.3333 683.27
300 Rs.2,100 Rs.630,000 0.5 1050
600 shares   Rs12,40,000   Rs.2,067 (rounded)

So, the correct average price in the above is Rs.2,067 and not Rs.2,050. So, if you sold these 600 shares of Reliance at Rs.2060, you may think you made a profit of Rs.10 but actually, you have made a loss of Rs.7, not even counting brokerage and statutory charges. That is why the average price is important.

For tax purposes, it is not the average price but the FIFO (First in First Out) method that is used to calculate the profit or loss. But even here, your guiding price should still be the weighted average price.

Frequently Asked Questions Expand All

You can check the liquidity on the trading terminal but remember that the price pane does not show you hidden orders. But you can see the chart on volumes executed on the stock for the day and for the past few days, which is good enough.

No, there is no such limit and the only limit is posed by the margin that you can place with the exchange. However, as an intraday trader, it is best to ensure that you do not overtrade and end up bearing too much of a cost that is not justified by the returns.

You can have a universe of around 50 stocks to choose from but you can at best track only around 10-12 stocks on a real time basis. Limit your daily trading population of stocks to just about 10-12 and keep an eye on the 50 stocks if you can add any of them.

Focus on stocks that are liquid, have low trade spreads in the market, ownership is not concentrated and focus on stocks that show a decipherable trend.