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Explore some commonly used methods used for intraday stock selection in this blog.
Intraday trading refers to buying and selling a stock on the same day. Market participants use intraday trading purely for speculative purposes (profit). The aim is to buy and sell quickly to make a quick profit without taking delivery of the stock.
This blog highlights some methods that traders can use and some important factors to consider for intraday stock selection.
Important Factors While Selecting Stocks
For a trader to select best stocks for intraday trading, it is crucial to consider these important factors:
- Liquidity and Volume
Liquidity refers to the ease with which a stock can be bought or sold without significantly impacting the price. High liquidity means there are a huge number of traders who are ready to trade the stock at that price. And volume refers to the number of shares traded.
While choosing stocks it is potentially beneficial to select highly liquid stocks for intraday trading. This way, if you place an order for any number of shares, it will get fulfilled easily, and you will be able to buy and sell the shares at your desired price, whereas a lack of liquidity can lead to delayed execution of the order, not getting the desired price or your order might not get fulfilled.
For example, before entering a position, traders can use tools like Bid-Ask Spread to gauge liquidity. A stock with a wider difference between bid (price buyers are willing to pay) and ask (price sellers are willing to sell for) can indicate lower liquidity and vice versa.
2.Volatility
Volatility means the movement in the prices of stocks in a given time period. If the volatility is high, it means the prices of stocks can give big price movements in either direction. If volatility is low, it means the stock prices might not move in either direction.
It is essential to account for volatility in intraday stock selection. Traders must choose stocks that have high or medium volatility. Medium to high volatility ensures that price targets or stop losses are easily reached so that the trade can be exited in the same trading session. Low volatility can lead to prices not reaching the stop or profit target.
For example, traders use historical volatility, where they gauge the volatility of a stock using standard deviation over a period of time. If the stock has been showing higher volatility recently, there might be a chance that it can keep showing high volatility in the near future and vice versa.
3.Avoid Penny and Low Capitalization Stocks
Penny stocks and Stocks with low market capitalization might seem attractive due to their occasional sharp price movements. But, these stocks can face liquidity issues, and they might be prone to manipulation.
Traders can consider a market capitalization filter. If your trading method shows a good trading setup in stock but has a lower market capitalization than your selected filter. You must avoid trading in that stock.
4.Avoid Companies under SEBI Surveillance
Multiple reasons can lead a company or directors of a company to be investigated by the government or the securities market regulators. It is usually best to avoid such companies for trading. For example, if a trader enters a trade in a stock of a company under surveillance or investigation, and on the same day, an unfavorable decision is taken against that company, then it can lead to significant losses for the trader, even if the trading setup is right. So, it is often best to avoid such companies during intraday stock selection.
Methods for Selecting Intraday Stocks
These are some of the most commonly used techniques to select stocks for intraday trading:
- News or Events based Trading
When companies announce their quarterly results, dividends, bonuses, or splits, or if there is some positive or negative news regarding the company, the stock prices can move substantially depending on the nature of the news.
Traders try to take advantage of these movements and make quick profits. Traders select a few companies and add various news and events trackers to these companies, and as soon as the news or events are announced, they get alerted and quickly place trades.
For example, If a company announces raising funds, and as a result of this announcement, the trader feels the share prices of the company can increase, then the trader can place their trade accordingly.
2.Stocks with Trend or Momentum
A commonly used method is the use of short-term momentum or short-term market trends in intraday trading. Momentum is the rate of change in the prices of a stock. A variety of momentum or trend indicators and intraday trading strategies are used for this purpose.
Traders try to find stocks that have been showing an up or down trend for the past few days and try to capture the trend. Similarly, traders can look for stocks that have had momentum for the last few hours or the past couple of days to try to find opportunities.
For example, if a trader spots that a stock has been in an uptrend for the last couple of days and the momentum for the trend is increasing, they can place a buy trade to capture the rest of the trend until the momentum fades.
3.Chart Patterns and Indicators
Traders also use a variety of intraday trading price patterns. Traders try to find chart patterns like heads and shoulders, double tops, triangle patterns, etc, on smaller time frame charts like 5-minute or 15-minute charts to find intraday trading opportunities.
Although chart patterns work better on bigger time frame charts, with enough experience and practice, traders can learn to use technical analysis for Intraday trading
Similarly, traders can also use Technical indicators like MACD, RSI, etc, on shorter time frames to find good trading setups. But learning and profiting from these intraday trading indicators takes a lot of experience.
Methods to Reduce Risks of Intraday Trading
Day trading is considered one of the most risky forms of trading. Mastering intraday trading takes time. Day trading can lead to significant losses if it is not done properly. Here are some intraday trading tips to lower the risk:
- Follow the System: Once you have properly made a trading plan, follow it. Sometimes, you will be tempted by your emotions to take traders expecting to recover your losses or make more profit. Do not succumb to your emotions, and keep following the plan.
- Use Stoplosses: Stop loss orders automatically square off your trading position if the trades reach a certain predetermined point against your trading setup. It protects from capital erosion. Traders must always use stop losses.
- Position Sizing: Do not risk all your capital in one trade. In general, you should avoid risking more than 1% to 2% of your trading capital in a single trading transaction. Position sizing techniques, you can limit the size of your losses.
- Overtrading: Traders must always remember that it is not essential to place trades every day. Intraday trading does not mean placing trades every day, even if there is no good trading setup. It is fine to miss a day or two without finding a trading setup.
Conclusion
Having a proper criteria for selecting intraday stocks is essential to avoid any significant chances of a loss. Traders must ensure that the trade setup is as per their trading plan and the stocks with ample liquidity and volatility are chosen. Additionally, technical indicators and proper risk management strategies can enhance intraday trading efficiency. Remember, consistency and discipline are key to becoming a successful intraday trader.
DISCLAIMER: This article is not meant to be giving financial advice. Please seek a registered financial advisor for any investments.
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