As a day trader, it becomes crucial to know how to pick the right stocks in order to succeed. Usually, individuals are not able to earn gains because of not selecting the appropriate stocks for their portfolio.
Unlike an equity investor who buys stocks with the intention to invest, intraday trading is about buying and selling your holdings during the same trading day. The main objective of the trader is to make profits by taking the advantage of stock market movements. Hence, the level of profits depend on the extent of fluctuations in the prices of the stocks that the trader holds in his portfolio. To perform intraday trading, you need to have an active online trading account. Intraday trading involves the buy/sell orders being specified by the person who is involved in trading.
The basic purpose of initiating orders is to close them or square off before the closing of the stock market. One of the major question that every intraday trader needs to address is “how to find the right stock for intraday trading”. After all, everything boils down to holding the right stocks when it’s about making huge profits in intraday trading. When you are picking stocks for trading, you need to keep a number of factors in mind i.e. qualitative as well as quantitative. You may come across hundreds of listed shares in the market but not every share is suitable for intraday trading. Thus, you need to make informed and accurate decisions in this domain.
For a beginner, picking the right stocks might seem like a challenge. However, it should not deter you from exploring wealth creation opportunities in the stock market. Here are a few criteria which will simplify the process:
One of the major criteria when doing intraday trading is the volume of the equity shares. Volume is indicated by the total number of shares which are being traded in a given market at a particular time of the day. By simply looking at the screen you may not be able to find out the stocks which are high in demand. Share volume helps you to shortlist the stocks which are being purchased in high volumes.
Resistance level refers to a price beyond which an equity share is not able to rise. The primary reason for this behaviour could be an overwhelming level of supply of the equity share at the particular price level in the market. As an intraday trader you may look out for which have broken resistance levels and are moving northwards.
Trading as per the stock lists
A few intraday traders may prefer to trade only in particular equity shares. The trader might have arrived at this stock list after conducting a detailed study of price movements of the shares.
Stocks in the news
Based on a positive development as regards the related companies, some of the stocks may perform well as per the expectation of the trader. He/she anticipates that it will move in the expected direction with good volume. You may think of trading in such shares after basic analysis.
Top gainers and losers
Usually, you may find a list of top gainers and loser shares on the social media and news channels as per the recent market activity. Such kind of lists provide a ready reckoner to pick the right stock that meets your requirements. However, do not blindly follow such lists, you may your use judgement and analysis as well.
You may study the price movement of stocks across different time horizons. An analysis of last one week’s price movements will indicate stocks that are closing in negative or positive on a continuous basis. An analysis of this kind will indicate the stocks suitable for intraday trading.
Liquidity is a critical factor when you are choosing stocks for intraday trading. Liquid stocks are those which are traded in huge volumes. It means that you are able to purchase/sell larger quantities of the stock without having considerable impact on its price. Usually, there are not enough buyers for illiquid stocks which prevents traders from placing orders in larger quantities. As compared to illiquid stocks, stocks which are volatile have tendency of having greater movements in the short run. Basically, the liquidity of the stocks is dependent on the the type of trades which a trader places in the market.
Correlation between Stocks and indices
Correlation between a stock and the industry or index is yet another factor determining suitability of a stock. You need to look for those stocks which are highly correlated with the major sectors and indices. It means that when there is an upward movement in the index or the sector, the price of the stock price also rises.
Additionally, those stocks which behave as per investor sentiment follow the expected price movement and are found to be reliable. Stocks of information technology companies are dependent on the dollar/rupee movement. A stronger rupee is going to reduce the earnings of the IT companies and results in lowering of their stock prices and vice versa.
Follow the Trend
While doing intraday trading, you can always prefer to move with the trend to earn profits on the expected lines. During a market when the overall prices are rising, you need to look for stocks whose price will rise accordingly. Conversely, a market slump calls for identifying stocks whose prices are going to fall.
Research before trading
It has been noticed that most of the intraday traders miss out on the research part. Undertaking quality research happens to be inseparable part of intraday trading. Start with identifying an index and then locating industries in which you are interested. Afterwards, create a list of stocks which are liquid. Follow up with the fundamental and technical analysis to arrive at the right stocks.
While venturing into stocks for intraday trading, do not blindly rely on others advice. You need to conduct an in-depth research and develop an understanding before buying any stock.