How to select stocks for intraday trading

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  • 15 Dec 2023
How to select stocks for intraday trading

To succeed as an intraday trader, you need to identify the right stocks to trade in. Once you have identified a selection of stocks and ETFs, you can then monitor and analyse these further to identify trends. The entry and exit strategies are dictated by the trends you observe. Let’s explore some rules and key factors to consider while selecting stocks for intraday trading.

There are a number of factors to consider when selecting stocks for intraday trading. Here are 8 rules that traders should follow.

1. Choose liquid stocks

Liquid stocks are those that are actively traded and have a high volume of shares being bought and sold. This means that you will be able to easily enter and exit your positions without affecting the price of the stock.

2. Avoid volatile stocks

Volatile stocks are those that are subject to sudden and large price movements. This can make it difficult to trade intraday, as you may not be able to predict their next move.

3. Invest in correlated stocks

Correlated stocks are those that tend to move in the same direction. If you buy one stock, you can expect the other stock to move in the same direction, which can help you reduce your risk.

4. Follow market trends

Intraday traders should keep an eye on the overall market trend. They have to make prompt buy and sell decisions basis market movements.

5. Use charting tools

Charting tools can help you analyse the price movements of stocks and identify potential trading opportunities.

6. Look for transparent companies

Transparent companies are those that disclose their financial information regularly. This makes it easier to assess the risk of investing in their stock.

7. Choose stocks with a presence in the derivatives segment

Stocks that are also traded in the derivatives market are more liquid and have higher trading volumes. This makes them more suitable for intraday trading.

8. Trade news-sensitive stocks

News-sensitive stocks are those that are likely to be affected by news events. This can create trading opportunities, but it is important to be careful as these stocks can be more volatile.

Watch and Learn
Intraday Trading Guide
Tune in to this video where Indu Choudhary will explain what intraday trading is in simple language along with examples. We will also take you though five key important rules you must keep in mind as an intraday trader.

1. Does the stock have a narrow tick spread?

The sustainability of narrow tick spreads in the stock market is based on several factors and can vary over time and across different stocks. Tick spread refers to the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for a particular stock. A narrow tick spread signifies a smaller difference between these prices, which can benefit traders and investors. Highly liquid stocks tend to have narrower tick spreads. Liquidity is driven by the number of market participants and trading volume.

Stocks with high liquidity often have tight spreads because there are more buyers and sellers competing, reducing the spread. The price of a stock can influence its tick spread. Generally, higher-priced stocks tend to have narrower spreads because the price difference between the bid and ask is a smaller percentage of the stock's value.

2. Does it show clear and decipherable chart patterns?

Narrow tick spreads do not directly impact the clarity or decipherability of chart patterns. Chart patterns, such as triangles, head and shoulders, flags, and double tops or bottoms, are formed based on price movements over time and are primarily a function of price action, volume, and investor sentiment. These patterns can occur in stocks with both narrow and wide tick spreads.

Stocks with narrow tick spreads tend to be more liquid, meaning they have higher trading volumes and more market participants. This liquidity can result in smoother price movements and more accurate chart patterns. In contrast, stocks with wider tick spreads may have fewer participants and less trading activity, potentially leading to choppier and less reliable chart patterns.

3. Is the price sensitive to news?

Price sensitivity to news flows, often referred to as news sensitivity, describes how quickly and significantly the price of a financial asset, such as a stock, responds to new information or news releases. It quantifies the extent to which market participants incorporate fresh information into asset prices, reflecting the efficiency of the market in processing news. In highly efficient markets, asset prices tend to be more sensitive to news, as traders and investors quickly incorporate new information into their decisions. In less efficient markets, price adjustments may be slower and less pronounced.

The type of news or information can impact sensitivity. Market-moving news, such as earnings reports, economic indicators, or significant geopolitical events, often leads to more pronounced price reactions compared to less impactful news. The composition of market participants matters. Institutional investors and algorithmic trading systems may react more swiftly to news than individual retail investors, potentially leading to rapid price adjustments. Liquidity in the market plays a role.

Conclusion

Selecting intraday trading stocks is a complex process that involves assessing liquidity, volatility, technical analysis, risk management, and continuous learning. Successful intraday trading relies on a well-thought-out strategy and the ability to adapt to dynamic market conditions. While there are no guarantees in trading, adhering to these principles can significantly improve a trader's chances of achieving success in the fast-paced world of intraday trading.

Traders should continuously practise and refine their skills. A trading journal can help track and analyse past trades, allowing traders to identify strengths and weaknesses in their strategies. Additionally, traders must remain disciplined, stick to their trading plans, and avoid emotional decision-making.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI prescribed Combined Risk Disclosure Document prior to investing. Brokerage will not exceed SEBI prescribed limit.

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FAQs on stock selection for intraday

Before taking a position, the intraday trader must assess whether the stock is liquid enough. If the stock is not traded in large volumes, squaring off the trade by market close could be tough. For example, this issue may arise in small-cap and micro-cap stocks. In contrast, large-caps and upper-range mid-caps tend to be sufficiently liquid for intraday trades. Such stocks generally attract enough buyers and sellers through market hours. However, a stock’s liquidity may vary from one day to another. That’s why it helps to put a number on it.

Being able to read technical charts is an essential skill for intraday traders. You should also be well-versed with trading indicators highlighting volume, trends, and market volatility. This will help you to assess if a stock is showing clear patterns. Study how the stock has moved historically to find if the same pattern has occurred earlier. With this information, you can trade based on how the stock is likely to move.

Yes, stock prices are sensitive to the news. As a result, they offer good day trading opportunities. When a stock reacts quickly, the news flow may offer hints about how the stock price could move. You can then place your buy and sell orders accordingly.

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