Intraday Trading Knowledge 4, How to Choose Stocks for Intraday Trading

How to Choose Stocks for Intraday Trading

To succeed as a day trader, it is important to know how to pick stocks for intraday trading. Often people are unable to make profits because they fail to select appropriate stocks to trade during the day.

Tips to Choose the Right Intraday Trading Stocks:

• Trade Only in Liquid Stocks:

Liquidity is the most important intraday trading tip while choosing the right stocks to trade during the day. Liquid stocks have huge trading volumes whereby larger quantities can be purchased and sold without significantly affecting the price. Generally, lesser liquid stocks do not provide traders the opportunity to purchase and sell larger quantities due to lack of too many buyers. Some traders may argue that illiquid stocks offer bigger opportunities with rapid price modifications. However, statistics show that volatile stocks show greater movements in a short period of time. Thus, most of the possible gains dissipate while the downside risk still looms. Nonetheless, the liquidity of the stocks depends on the quality of the trades placed by the traders. For example, a volume of 50,000 to 75,000 shares is sufficient if the trade is for 50 or 100 Rs; however, if the volume is few hundreds or thousands, volume requirements significantly become larger.

• Stay Away from Volatile Stocks:

It is commonly noticed that a low daily volume of traded stocks or those where some huge news is expected move in an unpredictable way. Sometimes, the stock may show volatility even after the announcement of the big news. Traders are recommended to avoid intraday trading in such stocks. A few volatile stocks are in the mid-size segment while most stocks traded in the low-cap categories like S, T, and Z are highly chaotic. In addition to being volatile, these stocks have low daily volumes, making them illiquid.

• Trade in Good Correlation Stocks:

An intraday tip for choosing the right stock is to opt for those that have a higher correlation with major sectors and indices. This means when the index or the sector sees an upward movement, the stock price also increases. Stocks that move according to the sentiment of the group are reliable and often follow the expected movement of the sector. For example, strengthening of the Indian Rupee against the Dollar will generally affect all information technology companies dependent on the US markets. A stronger rupee implies lower earnings for the IT companies and weakening rupee will result in higher export incomes for these companies.

• Follow the Market Trend before deciding the Right Stock:

One of the most important intraday trading tips is to remember that moving with the trend is always beneficial. During a bull run in the stock market, traders must try to identify stocks that can potentially rise. On the other hand, during the bear run, finding stocks that are likely to decline is advisable.

• Pick the Stock you are most confident in after Research:

Undertaking quality research is one of the most vital intraday tips that traders must always remember. Unfortunately, most day traders avoid doing their research. Identifying the index and then finding sectors that are of interest is recommended. The next step is to create a list of several stocks with these sectors. Traders need not necessarily include sector leaders, but rather identify stocks that are liquid. Technical analysis and determining the support and resistance levels along with studying the fundamentals of these stocks will help traders find the right stocks to profit through intraday / day trading.