How to Select Stocks for Intraday Trading

Buying and selling a security on the same day to obtain returns is known as intraday trading. Starting with how to select stocks for intraday trading is a most asked question. An intraday order for shares indicates that you intend to sell them before the end of the trading day, but you do not wish to acquire them. To complete the trade, these orders also let you acquire shares during the day and sell shares beforehand, even if you do not hold them. Choosing the appropriate stocks is crucial to the success of intraday trading since you have a limited number of hours to square off your position. In this article, we will explore the different types and strategies of intraday trading and provide insights on how to select intraday stock.

8 Rules for Selecting Stocks in Intraday Trading

You need to understand some essential rules and factors to make appropriate decisions while selecting stocks for intraday trading. There is no particular stock selection formula for intraday trading that you can use right away. Here are some practical tips on how to choose stocks for intraday trading:

1. Choose Stocks with High Liquidity

The most significant thing to look at when choosing an intraday trading stock is liquidity. Highly liquid stocks are suitable. This is because, with liquid stocks, you can buy and sell bigger quantities without affecting the price much.

Make sure to check liquidity at various price levels when picking liquid stocks. Also, at lower prices, you may see some stocks are highly liquid. However, after a certain price zone, the volume drops off drastically. Overall, once you understand how liquidity varies at different price levels, you will know when to buy these stocks.

2. Avoid Highly Volatility Stocks

For intraday trading stocks, volatility is just as important as liquidity. High volatility means there are many movements during the day, so there are many trading opportunities. Less volatility means fewer trading opportunities. However, when it comes to entry and exit, liquidity is crucial. So, stay away from stocks that are highly volatile or less traded.

Moreover, low daily volumes of traded stocks or those with major news can move unpredictably. You might still see volatility after the big news is announced. Yet, these stocks aren't good for intraday trading.

3. Invest in Stocks with Good Correlations

When choosing stocks for intraday trading, opt for those that have a higher correlation with major sectors and indices. So, when the index or sector increases, the stock price will also rise.

Usually, when stocks move in accordance with the sentiment of the group, they tend to follow the sector's expected movement. For example, the strengthening of the Indian Rupee against the Dollar will affect all US-based information technology companies. 

4. Make Sure you Follow the Trend

Whenever you are trading intraday, remember that going with the trend always pays off. When the stock market is bullish, try to spot stocks that are likely to rise. In a bear run, find stocks that will decline. Trends can be further divided into Market trends and Sector trends. 

• Market Trends: The market moves up or down depending on economic, political, and social factors. And stock's performance is correlated with the market's performance. So if the markets rise, the stock prices can too. 
• Sector Trends: In terms of sector, you can divide the market into technology, pharmaceuticals, automobiles, oil & gas, FMCG, and banking. 

You need to stay updated with all sectors' performance. If you find a sector or sectors that have been growing over months and are ready to break out, then you can invest in them. Additionally, if you have identified stocks that have made substantial gains, but you missed out on taking advantage of the rise, you can look at peers in the same sector.

5. Conduct Technical Analysis

To figure out when to buy and sell stocks, use a variety of technical analysis strategies. If stock prices show gaps in one direction or the other, analyze them. In intraday trading, these gaps present earning opportunities. 

6. Momentum of Stocks

An essential aspect of intraday trading is evaluating stock momentum. Seek for equities that have substantial trading volumes and robust price changes. Find stocks that have daily patterns that are consistently rising or falling. Stock momentum may be measured using technical indicators such as Moving Averages, MACD, and Relative Strength Index (RSI). Pay attention to stocks that exhibit consistent momentum and volatility, as they might present chances for successful short-term trading. 

7. Focus on Stocks Driven by News 

Stocks that are prone to being impacted by news events are known as news-sensitive stocks. Trading opportunities may arise from this, but caution is advised because these equities may be more volatile.

8. Pick After Doing Quality Research

The most important intraday trading stocks tip is to do quality research. The first thing you should do is find the index and then find sectors you're interested in. Next, make a list of several stocks that belong to these sectors.

You do not have to include the top-performing ones in the sector but look for liquid stocks. Also, by studying fundamentals and technical analysis, you can find the right intraday trading stocks to profit by determining support and resistance levels.

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What are the Types of Strategies Day Traders Use?

Below are the types of strategies day traders use for intraday trading. 

• Scalping: Scalping involves the intraday trader gaining from minor price changes on the spot. They open several positions within a single day and close them the same day. Even with a very slight difference, there can be gains. 
• Momentum trading: Trading with momentum is an intraday strategy in which traders buy and sell securities according to their recent price changes. They believe that the recent momentum will continue. If the momentum is constant and the stock rapidly gains upward pricing, then intraday traders will implement the price movement in a day of trading, hour, or minutes. 
• Breakout trading: This is where the intraday traders identify the stocks that are near their breakout price and likely to have a significant price move. They thus find out the support as well as the resistance points for the stock and observe the ones that are near their resistance points. That is where they identify the stocks that are near their breakout price. Once prices finally break away from the resistance, the stock price moves higher and can thus yield good profits to the intraday trader. 
• Trend trading: Trends that are dominating the market are analyzed and positions that ride the trend are created. Intraday traders use momentum indicators, moving averages chart patterns, and trendlines to learn the existing trend. In case the trend is positive, the traders go long on the stock and enjoy the upward move. 
• Contrarian trading: This is a strategy where a trader goes in the opposite direction of what a prevailing market trend dictates: buying when people sell and vice versa. Contrarian traders believe that extensive market sentiment can lead to false increases or decreases in price and at some point the stocks will reach their true value when the market corrects itself.
• News Trading: In the case of news trading, intraday traders exploit the news to take positions that will make them a profit when the news comes. In these cases, economic and financial calendars will be maintained to anticipate any type of news and respond to its impacts on stock prices.

The Best Type of Stocks for Intraday Trading

Choosing the best type of stock is crucial, now let's look at how to pick stocks for intraday trading. They include the following:

• Trend Stocks: There are trend stocks, which can be analyzed and predicted based on distinct trends. You are good to trade intraday once you understand this trend.
• Upper breakout stocks: The upper breakout is also suitable for intraday trading stocks. Invest after they break above the resistance level and keep your stop loss below the level.

Check out the breakout stocks here. 

• Lower breakdowns: You can also choose intraday trading stocks with lower breakdowns. Sell them when they break below the support and keep your stop loss above it.
• Herd Stocks: Investing in herd stocks is an easy way to obtain returns from intraday trading. Take the chemicals market, for example, if it's doing well, you can pick up any liquid chemical intraday trading stock and multiply your profits.
• Momentum: Another way is to trade intraday on momentum. The stocks that are making new highs or 52-week highs and have momentum are good intraday picks.

3 Factors to Consider While Selecting Stocks for Intraday Trading

When selecting stocks for intraday trading, it's crucial to consider factors that can impact your ability to make quick and informed decisions. Here are three key factors to evaluate before making your choice: 

1. Does the stock have a narrow tick spread?

In the stock market, the sustainability of narrow tick spreads depends on several factors that might change over time and between various stocks. A tick spread simply means the difference between the highest price a buyer wants to pay, also known as a bid, and the lowest price a seller is willing to accept for a particular stock, referred to as the asking price. A smaller spread of ticks would be beneficial for traders and investors. Highly liquid stocks will have narrower spreads of ticks. Liquidity is driven by the amount of market participants and trading volume.

Stocks with high liquidity will have narrower spreads because the competition is greater among buyers and sellers, narrowing the spread. The actual price of a stock will also affect its tick spread. Higher-priced stocks will generally have smaller spreads because the dollar difference between the bid and the ask is less percentage-wise than the value of the stock.

2. Does it show clear chart patterns?

Narrow tick spreads do not directly affect the clarity of chart patterns. Most chart patterns, such as triangles, head and shoulders, flags, and double tops or bottoms, are a function of price action over time and volume. These patterns are often influenced by investor sentiment. Chart patterns can form in both stocks with narrow and wide tick spreads.

Stocks that have narrow tick spreads are usually more liquid, having more volume and more participants in the market. A more liquid stock could mean better, smoother price movements and, therefore, better chart patterns. Stocks that have wider tick spreads may have fewer participants and lesser trading activity, and the charts could be less reliable. 

3. Is the price sensitive to news?

Price sensitivity to news represents the speed and size at which the price of a financial asset, adjusts in response to new information or news releases. It is an indication of how much new information is being absorbed into asset prices by market participants and hence shows the efficiency of price adjustment for news. In highly efficient markets, the prices of assets are much more sensitive to the news because traders and investors incorporate new information very promptly into their decision-making. In less efficient markets, the price adjustments may be less as well as slower.

The nature of news or information may be important. Critical news, such as earnings reports, economic indicators and significant geopolitical events, have greater price impacts than less important news. The identity of the participants in the market is important. Institutional investors combined with algorithmic trading systems can be expected to respond to news more promptly than individual retail investors, giving rise to fast-moving quotations.  

Conclusion

There are many factors to consider when choosing the right intraday trading stocks. Firstly, choose stocks with high liquidity to make larger trades without significant price impact. For better trading opportunities, avoid highly volatile stocks. Also, take advantage of market trends by investing in stocks that have good correlations with major sectors and indices. When picking intraday trading stocks, follow the overall trend, whether it's bullish or bearish. Analyze technical data to find gaps, support, and resistance. Moreover, do quality research to find fundamentally strong stocks.