5 mins read . 22 Dec 2022
Intraday trading is about initiating and closing positions on the same day. You can buy a stock and sell it before end of the trade or you can even short-sell a stock and buy it back before end of a trading session. Intraday is unique in the sense that you get just about 4-5 hours of time to initiate and also close your position. There are no deliveries in intraday trading as net position is zero. Your Demat account does not have much to do. Any profit or loss at the end of the day will be adjusted to your trading account.
Unlike delivery trading, which is about stock selection, intraday trading is about discipline. However, you cannot just trade intraday in any stock. You should be able to enter and exit the stock easily without price impact and it should give you adequate movement in the day, without being too volatile. While there are no hard and fast rules for selecting stocks for intraday trading, here are some ground rules that intraday traders can follow.
In stock market parlance, this is called liquidity but it means that you are able to enter and exit the stock without hassles and without too much price impact. If you were to underline one key factor in selecting stocks for intraday trading, it has to be market liquidity. Large-cap stocks or index stocks tend to be more liquid, but the problem is more obvious in small and mid-cap stocks.
Liquidity = Average daily volumes / Free Float Market capitalization
This is the simplest way to define liquidity. Look for an average liquidity ratio of at least 2-3% for large-cap stocks and 5-7% for mid-cap stocks. Remember this is the average of the total volumes of delivery plus intraday. On the denominator, use the free float market cap instead of the overall market cap, as it is more representative of liquidity.
Here you must look at two things. The tick (minimum gap between two orders) must be the lowest possible. At each tick, the volumes should be robust. The last thing you want in intraday trading is to place an order and realize there is not enough liquidity to execute. You cannot do intraday trading in stocks where ticks are too wide apart or where some ticks don’t see good volumes.
You can quickly check it out in the ownership pattern. Check for the number of shareholders. When stocks are widely held, it is tough for a handful of investors to influence the price. In case of closely held stocks, they become pump and dump candidates. A clutch of investors can direct stock prices through a broker and then vanish from the counter once it is sufficiently high. Avoid such stocks for intraday trading.
In intraday trading, you just have about 4 hours at your disposal, so you cannot take chances with chart patterns. Good, bad or ugly; the chart pattern should be clear, reliable and predictable. Where these conditions are not satisfied, don’t pull them into intraday trading. Stock movements must depict clear chart patterns, otherwise, you are likely to be fooled by randomness.
A lot of intraday trading is a reaction to news. You need stocks that react instantly to news flows and behave in a rather predictable and rational way. Otherwise, they are not useful for intraday trading.
Intraday trading is a high-risk game which calls for discipline and speed. These five rules can ease the burden on the shoulders of intraday traders.