How to Select Stocks for Intraday Trading

8 Rules for Selecting Stocks for Intraday Trading

Selecting the right stocks for intraday trading is crucial for maximising profits and minimising risks. Here are eight essential rules to guide your decision-making process.

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.

3 Factors to Consider While Selecting Stocks for Intraday Trading

Intraday trading lives at the intersection of opportunity and risk, where split-second timing can mean the difference between profit and loss. Picking the stocks most likely to move in your favour is paramount to conquering this high-stakes arena. Numerous variables impact stock choice, but zeroing in on those directly tied to the aims of short-term speculation can substantially increase the odds of success. Remember these three important aspects when picking stocks for intraday trading.

1. Narrow Tick Spreads

The tick spread, or the difference between the bid and ask prices, is one of the most crucial aspects to be examined in intraday trading. A narrow tick spread leads to lower transaction costs, which is crucial for an intraday trader with many trades on a typical day.

Smaller spreads also cause less slippage, allowing you to enter and exit positions more effectively. The smaller the spread, the smaller the stock price move you need to make a profit. Therefore, liquid stocks have narrower spreads and are suitable for intraday trading. With increased liquidity, the stock is easier to buy and sell. It also ensures that transaction costs decrease and traders can make the most of their profit.

2. Price Sensitivity to News

Back-and-forth price action is great for intraday trading, and news events can cause such price action. Hence, it is important to choose stocks that respond to news and market developments. Stocks of companies that issue earnings reports unveil new products or make important announcements tend to have the biggest price movements during the trading day.

Likewise, stocks in industries such as technology or health care might quickly react to geopolitical developments, government action, or economic data. Intraday traders need to keep close tabs on news feeds and market updates to take advantage of prices that are sensitive to breaking news. Stocks that react aggressively to news allow for more explosive price swings and greater profit potential for short-term traders.

3. Chart Patterns

Intraday traders depend greatly on technical analysis, and chart patterns are the most effective tool for forecasting short-term price movement. Utilising technical analysis means recognising repetitive patterns like flags, pennants, triangles, or head-and-shoulders that can give insight into the direction of the prices.

Apart from them, these patterns generally assist traders in identifying the trend, breakout opportunities, or reversal points, which strongly favours intraday decision-making. Stocks that form predictable patterns can be easier to trade, as these patterns provide good visual cues for entry and exit points. However, chart patterns must be combined with other technical indicators for more accurate predictions.

Conclusion

Selecting the right stocks for intraday trading is an art that combines market knowledge, timing, and strategy. Traders can maximise their chances of success by focusing on factors such as liquidity, price sensitivity to news, and chart patterns. Implementing the right rules and monitoring these crucial aspects can help you navigate intraday trading more effectively, making informed decisions that drive profitability while managing risks.