Doing intraday trading is one part of the story. The bigger question is how to pick stocks for intraday trading. Obviously, not all stocks would be eligible to trade intraday as you need stocks that are predictable yet responsive to news flows. There are a number of ways but there are some broad rules and parameters that you can follow. For example, you can combine stability, responsiveness and patterns to decide how to select stocks for intraday.
The big challenge is to first prepare a universe of stocks for intraday trading. Obviously, your universe cannot be more than 50-60 stocks that are highly liquid. Even these many stocks are tough to track and trade so you need to zero in on the 10-12 best stocks for intraday trading. Now, when we say best stocks for intraday trading, it is not about the profits they could give but how reasonably possible it is to trade them profitably on a consistent basis.
How to choose stocks for intraday trading?
Let us now get to the practical aspect of how to choose stocks for intraday trading. The first step to zeroing in on the best stocks for intraday trading is by creating a trackable universe of stocks. You can use filters and screeners to zero in on these stocks. But remember that the ones you identify as the best stocks for intraday trading must meet your intraday trading criteria in almost all ways.
Let us start off with some elementary steps to identify the best stocks for intraday trading in a scientific and systematic manner.
- The first rule is to always stick to the time tested and liquid stocks universe. They will not enable easy execution but they also ensure that you don’t get caught up in spread risk or the risk of not being able to exit intraday.
- One interesting way to identify the best stocks for intraday trading is to filter them on their movement. Look at both the rupee movements and the percent movement to get a clearer idea.
- By being wary of stocks that are too closely correlated to the market as they almost become a replica of the index. It is best to look at stocks that have their own unique price movement patterns. They are normally the best stocks for intraday trading.
- A stock may be volatile and look attractive but such unpredictable stories have their own limitations. You may get into such stocks and then find yourself stuck without an exit route or the spread may be too large.
- Avoid stocks that have limited free float and where the promoter holding is too high. These won’t qualify as the best stocks for intraday trading as they can be easily controlled by a clutch of traders and you need objective stocks.
Remember, that as an intraday trader your success begins with identifying the right stocks to trade in. Once you have identified such stocks, you can closely monitor and evaluate these further to identify trends. It is only when you can identify distinct trends that you can devise your entry and exit strategies.
So, let us quickly sum up the rules for stocks to qualify as the best stocks for intraday trading.
- The stocks must be liquid and must have large volume trading through the day. This means sufficient volumes and also thin spreads to reduce your spread risk.
- Yes, you need volatility and the volatility must be medium to high. However, the volatility cannot be extremely high or extremely low. Trends must be identifiable.
- Never try to beat the market with the stock intraday or beat the daily trend. A good intraday stock follows the broad trend and so should you.
- One criterion of best stocks for intraday trading is a stock that follows the group trends and indicators closely. An example is an IT stock that tags dollar strength.
- Don’t look for contrarian stocks in intraday trading. That is for long, long-term investors. Look for stocks that follow a pattern that can be explained and extrapolated.
Finally, let us look at the types of stocks that will typically fit your bill as the best stocks for intraday trading. Here are five types of stocks that will suit your intraday trading.
- The first kind of stocks are the trend stocks that follow distinct trends that can be analysed and extrapolated. Once you grasp this trend, you are good to trade intraday.
- Upper breakout stocks are also good for intraday trading. You need to get in after they decisively break above the resistance and keep stop loss below the resistance.
- Lower breakdown stocks are also good for intraday trading. You need to sell them after they decisively break below the support and keep stop loss above the support.
- An easy way to intraday trading is in herd stocks. For example, when chemicals are doing well, you can pick up any liquid chemical stock intraday and multiply the effect.
- One way is to trade intraday on momentum. For example, stocks that are making new highs or 52-week highs have momentum in their favour and are good intraday picks.
Let us sum it up about the most important issue when it comes to picking the best stocks for intraday trading. The said stock must be liquid, show clear trends, have low impact costs and must respond proactively to news flows. Above all, avoid stocks that are very closely held or closely owned. That is the starting point to select stocks for intraday trading.
How to start intraday trading?
You may get tired of listening to this ad nauseam but any trading, whether intraday or delivery, must begin with opening your trading account and demat account. Remember, intraday trading does not result in delivery, so do you need a demat account if you only intend to trade intraday. The answer is you do require as SEBI rules stipulate that no trading in equity in any form is permitted without having a demat account linked to trading account.
If you are a frequent and regular intraday trader, then it is best not to mix up your intraday trading with your regular delivery trading. Keep that account separate as it is easier for tax purposes and also for monitoring performance and profits. You can also sign up for the right tools in this case that will help you with intraday trading.
Here are some stepping stones for starting intraday trading. Before you commence intraday trading, spend some time examining daily charts so that you can familiarise yourself with the price patterns, trends, breakouts etc. You have to be the analyst and trader. There are various tools that give technical support and most importantly keep abreast of the news flows.
What is the average price?
The concept of average price is important as you don’t buy all stocks in one go. For example, if you buy 100 shares of RIL at Rs.2000, 200 shares at Rs.2050 and 300 shares at Rs.2100, what is your average price. Is it Rs.2050, which is the average of the 3 prices? No, it will be the weighted average as you bought different quantities so you must weight these quantities by the prices. Here is how you get the average price.
Buy Price Buy Quantity By Value Quantity Weight Wt. Price 100 Rs.2,000 Rs.200,000 0.1667 333.4 200 Rs.2,050 Rs.410,000 0.3333 683.27 300 Rs.2,100 Rs.630,000 0.5 1050 600 shares Rs12,40,000 Rs.2,067 (rounded)
So, the correct average price in the above is Rs.2,067 and not Rs.2,050. So, if you sold these 600 shares of Reliance at Rs.2060, you may think you made a profit of Rs.10 but actually, you have made a loss of Rs.7, not even counting brokerage and statutory charges. That is why average price is important.
For tax purposes, it is not the average price but the FIFO (First in First Out) method that is used to calculate the profit or loss. But even here, your guiding price should still be the weighted average price.
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