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

How to decide whether a stock is fit for intraday trading

Intraday trading is somewhat of a phenomenon in the stock markets today. When novices hear about it for the first time, they picture themselves earning huge returns in the brief span of 24 hours. This is quite contrary to the real picture that is painted by this trading strategy. You may select the best stocks for intraday trading, based on a plethora of information, but this kind of trading is best studied for a while before you jump into the fray. 

 

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. The key to any successful trade is to select the best stocks that markets have to offer, but for intraday trading, you have to be even more picky as you have to open and close trades on the same day. With such a limited time, you have to think of the best possible ways to make gains. 

 

How to Select Stocks for Intraday Trading?

 

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 the best intraday stocks to buy today in India 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. Selecting your stocks may be vital in making your trades successful. This may take a little time and preparation before you actually actively go in for any intraday trading. You cannot make stock selections on the spur of the moment. Basically, you need stocks that can give movement and at the same time are predictable. Momentum and predictability often don’t go hand in hand, but there are some stocks that do have both traits of movement and tend to offer you fairly good potential returns. Identifying them is the main aspect before you start. Here are 5 parameters you should consider when you want to know how to pick 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. The best stocks for intraday trading today are those that offer a high degree of liquidity, ensuring you can exit them on time. 

 

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 you must always 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?

The best intraday stocks to buy today in India are those which are widely held. 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, you should 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. The most seasoned intraday traders, one who have got a consistent track record of making gains in intraday stock trading, will tell you that intraday trading essentially requires fundamental and technical analysis to attain success. As you have such a short span to trade in, you must know your stocks and their movements well enough, with confidence, to trade quickly. Therefore, how to select a stock for intraday one day before can be a challenge. You need to do a lot of hard background work. 

Intraday trading is all about decipherable patterns and it is not rocket science. You can easily study about 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. One way to go about studying charts and gettin some help is through a reputable broker. 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. What this ensures is some degree of predictability and hence, success in your trades. Intraday trading is based on the premise that past patterns will repeat and so you can trade accordingly. Although, you shouldn’t depend on this kind of premise totally, it's a good trend to follow in general while undertaking intraday trading. 

 

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. The best stocks for intraday trading today rely on the news and are influenced by it. 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 looking 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. Therefore, intraday trading is based on market sentiments which rely on the news, and in turn, the stocks which rely on such sentiments and news reports. 

 

How to Pick Stocks for 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. Some tips to recap so that your execution of trades meets with success are to trade with liquid stocks to engage in rapid trades, filter your stocks so that they are largely based on percentage and rupee value shifts, and classify shares as strong or wea, depending on correlations with markets. After all, you just have a window of 390 minutes to close both sides of your trade! 

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