How to decide whether a stock is fit for intraday trading - Motilal Oswal
How to decide whether a stock is fit for intraday trading - Motilal Oswal

How to decide whether a stock is fit for intraday trading

If you think that intraday trading sounds very exciting and daring, you may be mistaken. In reality, intraday trading is largely about how to move ahead with discipline in a variety of areas. One such area of discipline is in the selection of stocks to trade intraday. Remember, you cannot just trade intraday on any stock. You have to be very selective. But let us spend a moment on understanding what intraday trading is all about. It is all about initiating and closing out your trades on the same day. It can either be a buy transaction closed out by an equivalent sell transaction or the other way round. For example if you buy 500 shares of Reliance in the morning at Rs.1,100 and sell it by evening at Rs.1,120, then you can book a profit of Rs.10,000 (500x20) intraday. This trade does not result in any delivery as your net position at the end of the day is zero. You can also sell in the morning and buy back in the evening if you believe that the stock is likely to go down. If you want to short sell stocks (without delivery), then the only way you can do it in rolling settlements mode is intraday.


Coming back to the topic of selection of stocks for intraday trading, let us focus on how to pick stocks for day trading in India. Is there anything like a best intraday stocks list or a list of top 10 stocks for intraday trading? While such a list could be a very dynamic list and subject to constant change, here is a very fundamental approach to shortlisting stocks for intraday trading. Remember, this is one of the most important steps before embarking on actual intraday trading. Basically, you need stocks that can give movement and at the same time are predictable. Here are 5 parameters you should consider when you select stocks for intraday trading.


Liquidity in terms of volumes is the Holy Grail

Market liquidity is the most important parameter when looking at a stock for intraday trading. You certainly do not want to enter a position and worry about how to exit the same. This problem gets a lot more pronounced in the case of small stocks. Most of the F&O list stocks and the index stocks are normally quite liquid. Liquidity is measured as the quotient of average daily volumes on the stock and the market capitalization of the stock.


Liquidity = Average daily volumes / Market capitalization


Normally, a minimum liquidity volume of 10% can be used as a benchmark but one also needs to ensure that this liquidity is sustainable and is liquidity of high quality.


Does the price of the stock get impacted when I place an order?

In technical parlance this is called the impact cost? It is the impact on the stock price when you place a large buy or sell order on the stock. Lower the impact cost, the better it is for you. Obviously, you can get stocks with zero impact cost but prefer the one with lower impact cost. When impact cost is high, risk of intraday becomes too high and hence such stocks should be avoided for intraday trading. High impact cost means you will get the stock at a price that could be unfavourable to you in case of large orders. This will change the economics of your intraday trade. If you choose to trade with a large capital and place big orders, then this is a vital point.


What is the ownership structure of the stock; wide or narrow?

You can check out these details in the ownership pattern of the stock which is available on the websites of the exchange. You can also get cues from the trading pattern of the stock. Stocks that are not widely owned are normally more volatile and also hit circuit filters easily. You don’t need to be prompted, you can certainly find out those names on the ticker screen itself. A handful of market operators will be able to corner narrowly held stocks quite easily. As an intraday trader, always prefer stocks that are liquid and widely owned. That will reduce your risk substantially.


Does the stock’s chart show clear and decipherable chart patterns?

Lesson No. 1 – If you are an intraday trader, you have to be a technical analyst too. Intraday trading is all about decipherable patterns and it is not rocket science. You can easily chart patterns and take a judgement in your intraday trades. So, you don’t have a choice; you must develop the capacity to read charts on your own. Above all, ensure that the stock depicts clear chart patterns. It is not possible to trade in a stock that does not have sufficient history or which does not depict a clear pattern. Only with a long history, you can decipher patterns and then trade for a repeat of these patterns. Intraday trading is based on the premise that past patterns will repeat and so you can trade accordingly.


You need stocks that react to news; not silent and inert stocks
As an intraday trader you would rely on two factors to trade; decipherable chart patterns and sensitivity to news flows. You cannot trade intraday in a stock that does not react to news. Just to take a very plain example, you would struggle to trade intraday on a stock like NTPC. You are look at stocks that are sensitive to news. That is why your strategy of buying on expectations and selling on announcements can actually work in the realm of intraday trading.
Shortlisting the right stocks is one of the most important and fundamental disciplines of Intraday trading. The key is to keep your stock universe limited so that you can do justice tracking these stocks. After all, you just have a window of 390 minutes to close both sides of your trade!

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