Intraday trading is the act of buying and selling securities (stocks, bonds, currencies, etc.) within the same trading day. This means traders open and close their positions within the same day, with the goal of making a profit from the fluctuations in the market. This requires a thorough understanding of the market and technical analysis, as traders need to identify short-term trends and patterns to place trades accordingly. They must also be able to make quick decisions and react promptly to market changes.
Due to the high risk involved in intraday trading, it requires an experienced trader with sound knowledge of the market and a carefully crafted trading plan. Traders often use leverage to amplify their trading positions, which can lead to significant gains or losses.
Let’s will discuss the different ways to select stocks for intraday trading.
Liquidity
Liquidity is the ease with which a stock can be bought and sold in the market. When selecting stocks for intraday trading, it is important to choose stocks that are liquid. Trading in highly liquid stocks ensures that traders can exit positions quickly and easily without facing any significant slippage. Stocks with low liquidity can be difficult to sell quickly and may have higher bid-ask spreads.
Volatility
Volatility is the measure of price fluctuations in a stock. When selecting stocks for intraday trading, it is essential to choose stocks that have medium to high volatility. Please note that the following information is meant for informational purposes only. And it is important for any investor to gauge their own risk appetite before investing their money in the stock market. Stocks with low volatility are difficult to make profits with due to their minimal price movements. However, stocks with high volatility can also be risky as they can experience sudden price fluctuations.
Market trends
Keeping an eye on the market trends is crucial. Traders should choose stocks that are moving in tandem with the broader market trends. During market uptrends, traders should look for stocks that are performing well, while in market downtrends, traders should look for stocks that are declining in price.
Sector trends
Another important factor while selecting stocks for intraday trading is to consider sector trends. Traders should pick stocks from sectors that are showing positive trends. For example, if the IT sector is performing well, traders should look for IT stocks that are likely to move up in price.
Momentum of stocks
Momentum is the measure of how fast the price of a stock is moving in a particular direction. Traders should select stocks that have good momentum, i.e., stocks that are moving up or down fast and steadily. The momentum of stocks can be identified by analysing price charts, moving averages, and relative strength indicators.
Technical analysis
Technical analysis is the study of past prices and trading volumes to predict future price movements. Traders should use technical analysis to identify trends, support, resistance levels, and chart patterns to select stocks for intraday trading. Technical analysis can provide a good entry and exit point for traders.
Factors to consider while selecting stocks for intraday trading
As an investor, you should consider three factors while selecting stocks for intraday trading:
Narrow tick spread
Tick spread is the difference between the highest price a buyer is ready to pay for the stock (bid price) and the lowest price a seller is ready to accept (ask price) for the same stock. When selecting stocks for intraday trading, traders should identify stocks with a narrow tick spread. The smaller the difference between the bid and ask prices, the higher the potential profit for the traders. Highly liquid assets, which are ideal for intraday trading, usually have a narrow tick spread.
Since highly liquid assets have a large number of buyers and sellers, they provide better and quicker cash realisation to traders, which is very important as intraday traders must sell the shares immediately to profit. Furthermore, stocks with a higher current market price have a narrow tick spread as the price difference between the bid and ask prices makes up for a small percentage of the stock’s value.
Clear chart patterns
Technical analysis is one of the most influential factors when it comes to selecting stocks for intraday trading. It involves analysing chart patterns such as flags, head and shoulders, triangles, double tops or bottoms, etc., to predict the immediate price direction of the stock. Analysing chart patterns is vital as they are formed based on investor sentiments, current market trends, price action, and trading volume.
While selecting stocks for intraday trading, ensure the stock has clear chart patterns that you can easily analyse. For example, if a stock has a high trading volume, it would mean the stock is highly liquid with a narrow tick spread. If you can not easily analyse the chart patterns, it would mean that the stock may have lower liquidity, making it unsuitable for intraday trading.
Price sensitivity to news
In general, news impacts the price of a specific asset. However, the level of impact is different for different stocks. For example, news of bagging a new order may lead to a remarkable price increase for a lower-priced stock, while it may only lead to a slight increase in price for a higher-priced stock. This price sensitivity to news, called news sensitivity, can significantly impact the return potential of stocks you choose for intraday.
Hence, you must analyse the news sensitivity of stock based on past sensitivity. For example, if a company has earned 50% more profit YoY and its earnings report increased its price by 10% on the day of the news, you can estimate the impact based on its current earnings reports.
What are the types of strategies day traders use?
Here are the types of strategies day traders use for intraday trading:
- Scalping: Intraday traders use scalping to profit from the small price movements of stocks in real time. For this, they create numerous positions during market hours and sell them simultaneously or one after the other, even when there is only a slight price difference. The strategy allows earning accumulated profits from multiple small profits.
- Momentum trading: Momentum trading is an intraday strategy in which traders buy and sell securities based on the recent price trend, as they believe that recent momentum will continue. If the momentum is consistent and the stock is increasing in price, intraday traders will utilise the price movement within the trading day, hour, or even minutes.
- Breakout trading: Intraday traders identify stocks close to their breakout price and are ready to make significant price movements. They identify the stock’s support and resistance levels and look for stocks that are close to their resistance levels. When the price finally breaks resistance, the stock price increases, allowing for good profits for intraday traders.
- Trend trading: Trend trading includes analysing the current trend and creating positions accordingly. Intraday traders use momentum indicators, moving averages, chart patterns, and trendlines to understand the current trend. If the trend is positive, they buy the stock and profit from the uptrend.
- Contrarian trading: Contrarian trading is a strategy in which traders go against prevailing market trends, buying when others are selling and selling when others are buying. Contrarian traders believe that extensive market sentiments can lead to false increases or decreases in price and that the stocks will reach their true value when the market corrects itself.
- News trading: News trading is when intraday traders use the impact of news on stock prices to create positions and make profits. They monitor economic and financial calendars and determine when a specific type of news will be published and how it will impact the stock price. Depending on the type of news and its impact, they buy the stocks accordingly.
How do day traders determine the liquidity of a stock?
Here are the indicators intraday traders use to determine the liquidity of the stocks:
- Trading volume: Intraday traders look at the total number of units bought and sold in a single market session for a specific stock. It allows them to analyse the stock’s liquidity and market depth. A higher trading volume means there are more buyers and sellers, and intraday traders can buy and sell the stocks quickly.
- Bid-ask spread: Bid-ask spread or tick spread tells the difference between the bid and ask prices. Intraday traders look for a narrow tick spread, which means that the stock has high liquidity. On the other hand, if the bid-ask spread is large, it means the stock has lower liquidity.
- Order book: The order book provides information about all the buy and sell orders for a specific stock. Every order has a price and volume attached to it, which intraday investors can analyse to understand whether the demand for the stock is high or low. If the order book is large, the liquidity for the stock is likely to be high as well.
- Time and sales: Time and sales let intraday traders analyse the liquidity and the overall demand and supply for the stock. This is possible because the time and sales tool shows the price and volume for every trade order of a specific stock.
- Market depth: Market depth indicates the number of buy and sell orders at different price points, reflecting the market's ability to absorb large transactions without significantly impacting the stock price. High market depth suggests strong liquidity, meaning large orders can be executed with minimal price changes. Conversely, low market depth indicates lower liquidity, where large orders may cause substantial price fluctuations.
How do day traders determine the correlation of a stock?
Correlation of the stock provides insights into the stock’s movement when compared to other stocks or a stock market index. Intraday traders use metrics such as scatter plots, rolling correlations, correlation coefficients, and regression analysis to determine a stock’s correlation.
- Scatter plot: These graphs allow traders to plot the price movement of two stocks to visually identify the relationship between them.
- Correlation coefficient: This metric allows traders to calculate the degree of movement of two stocks in relation to each other.
- Rolling coefficient: This technique calculates the correlation coefficient over a moving time window, allowing traders to see how the correlation between two stocks changes over time.
- Regression analysis: Using regression analysis, traders can determine how the price movement of one stock can be predicted based on the price movement of another stock or a market index.
How do day traders figure out where to exit winning and losing positions
Traders determine where to exit winning or losing positions by deciding profit-booking level and stop-losses. They also use the following indicators to decide the profit-booking and stop-loss price levels:
- Technical analysis: Intraday investors analyse stocks on their technical indicators to determine if they have the potential to increase in price or if the price will fall.
- Volatility: If the volatility of the stock is higher, traders can make short-term gains in the stock, making it ideal for intraday trading.
- Risk-reward ratio: This metric helps traders identify a stock’s profit potential relative to its loss potential.
Conclusion
Selecting stocks for intraday trading requires proper knowledge of the stock market and sound trading decisions. Traders should consider factors such as liquidity, volatility, market trends, momentum, and technical analysis while selecting stocks for intraday trading. Additionally, traders should have a risk management strategy in place to manage their positions during intraday trading.
Investors should practice due diligence by conducting proper research and consulting with their financial advisors before making investment decisions. Seeking professional guidance can help investors to minimise risks, make informed decisions, and navigate the complex nature of the stock market.
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