How to Decide Whether a Stock is Fit for Intraday Trading?
Intraday trading may seem like a daring and thrilling task, but that may not be the case. Instead, intraday trading is all about moving ahead with discipline and research. One area of research and discipline is choosing the right stock to trade intraday.
You have to understand that you cannot trade intraday on any stock. Remember, you have to be very selective and choose the right stock to earn profits.
Intraday trading refers to initiating and closing your stock on the same day. For example, if you buy 1000 shares of A company at ₹100 per share in the morning and sell the shares at ₹130 in the evening, then you book a profit of ₹30,000 (1000 x ₹30) intraday.
But, selecting the right stock to trade intraday is important if you want to book profits. You need to trade in a stock that has movement but yet is predictable so that you can trade confidently.
Top Ways to Decide Whether a Stock is Fit for Intraday Trading
Here is a list of parameters that will help you decide whether a stock is ideal for intraday trading.
- Liquidity of the stock
Market liquidity is an important factor when it comes to the selection of stock for intraday trading. You do not want to be in a spot where you have to worry about exiting the trade after entering into a position. This problem persists in the case of small-cap stocks. Generally, index stocks and F&O list stocks are considered highly liquid.
The liquidity of a stock is measured as the ratio of the average daily volumes of the stock and the stock’s market capitalisation.
Liquidity = Stock’s average daily volumes/Stock’s market capitalisation
Mostly, a 10% liquidity ratio should be considered as a benchmark to select a stock for trading intraday. But, you need to ensure that the liquidity is of high quality and is sustainable.
- Impact Cost of buying and selling the stock
Impact cost is the influence in the cost of the stock price when you place a large sell and buy order on the stock. If the impact cost is low, it is always better for you. Although you can get stocks that do not have any impact cost, your preference should be towards stocks that have a lower impact cost.
If this impact cost is very high, the risk of trading increases immensely, so such stocks should be avoided. High costs also mean that you will be getting the stock at a price that might not be favourable for you when you place a large order. Therefore, if you trade with large orders and a huge amount of capital, this might be a valid point for you.
- Structure of ownership of the stock
The ownership pattern of the stock is available on the websites of the stock exchange. You can also take pointers from the trading pattern of a certain stock. The stocks that are not widely owned tend to be highly volatile and can hit circuit filters very easily. Only a few operators in the market will be able to corner such narrowly owned stocks with ease. Therefore, as an intraday trader, you must opt for stocks that are very liquid and are widely owned so that you do not face any issues.
- Readable chart patterns
Reading and understanding technical charts is one of the top things that everyday trader must know. Although you must know how to read the chart accurately on your own, the stock that you choose must have crystal clear chart patterns. Trading in a stock that lacks history or has unclear chart patterns is risky and not recommended. Intraday trading is based on the assumption that the patterns in history will repeat and will help you earn profits on your trade.
- Effect of news flows on the price
An intraday trader is dependent on two factors when it comes to trading: price sensitivity to news flows and readable chart patterns. If a stock does not react to the news, then trading in that stock is not ideal. Basically, you have to trade in stocks that react to the news. This is because, as an intraday trader, your trade is based on the principle of buying the stock on expectations and selling the stock as per the announcements.
Also Read: Flag Chart Pattern & How to use it for Successful Trading?
To Sum it Up
Intraday trading is based on shortlisting the right stocks and being disciplined with the selection and trading of the stocks. The best way to do justice to your stocks is by keeping a limited number of stocks so that you can track each one easily and efficiently.
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Frequently Asked Questions
Intraday trading means initiating and closing your stocks on the same day. The motive for intraday trading is profits.
For new investors, prevalent intraday trading might be a good option. This type of trading provides low-risk entry points, and the gains that you can make are high if the trend continues. But, you need to ensure that you know the market well before you start trading.
You should consider various factors when choosing stock for trading intraday. These factors include the liquidity ratio of the stock, nature of ownership of the stock, chart patterns of the stock, and price sensitivity of the stock towards the news.