How to identify stocks for intraday trading? Things to keep in mind while doing intraday trading

We list the IPO companies that got the highest subscription, their listing gains, current gains, and brief analysis of performance.

How to identify stocks for intraday trading?

In Part 1, we have understood what intraday trading is. To start intraday trading, you first need to identify the stocks that you will be trading in. Keep the following pointers in mind when identifying stocks for intraday trading:

a) Choose liquid stocks

A stock is said to be liquid if trading volumes are high, and entry and exit in the share happen smoothly closest to the market price. You should choose stocks in which the trading volumes are high – you will be easily able to exit your open positions. If the stock in which you have taken an open position doesn’t have enough liquidity, closing the trade can be a challenge. Also, high liquidity ensures you can buy and sell the stock closest to the market price. Index stocks and other large-cap stocks usually have high liquidity. Hence, you should focus on these stocks for intraday trading.

b) Choose stocks that have a decent to large price movement range every day

You should choose stocks where the daily share price movement is in the range of 2%-5% or above. Instead of percentage movement, you can also consider stocks where the daily share price movement is in the range of (say) Rs 25 to Rs 50 or above. Please note that you will be able to make money only when the share price has a decent to large price movement range every day. If you choose a stock where the price movement range is stagnant, there is a high likelihood that you will end up with little to no profit.

c) Choose stocks that move with the market trend

Some stocks move with the market trend, i.e., they move up when the market is up, and they move down when the market is down. On the other hand, there are defensive stocks or contrarian stocks that go against the market trend. So, when the market is down, these stocks usually go up and try to arrest the market fall. For example, in Indian markets, stocks belonging to the IT, FMCG, and pharma sectors are considered defensives.

As an intraday trader, you should go with stocks that move with the market trend. The opportunity to make money is higher with these stocks as some move more than the overall market. For example, if the market is up by 1%, trending stocks will move up by 2%-3% or even higher.

d) Choose event or news-driven stocks

During market hours, if some news is expected related to a specific stock, you can take a position in the stock before the news unfolds. For example, a stock that announces monthly sales numbers (automobiles), quarterly results, etc. Some stocks are affected by court verdicts, government fiscal policy announcements, RBI monetary policy announcements, Union or State budget announcements, etc. If you have already taken a position, and if the news is on expected lines, you will stand to gain. If the news is adverse, you will most likely incur a loss.

Stocks such as Reliance Industries, HDFC, TCS, Hindustan Unilever, ICICI Bank, Tata Steel, etc., satisfy most of the above criteria for intraday trading. These are index stocks as they are a part of the NIFTY 50 Index, are very liquid, have a good price movement range every day, and usually move with the market trend.

Things to keep in mind while doing intraday trading

Now that you have identified the stocks and are ready to do intraday trading, you should keep the following suggestions in mind:

a) Identify multiple stocks for trading

At any point in time, you should have identified multiple stocks for intraday trading. Never put all your money on one stock or one trade. If you have multiple open positions, you can continue to benefit from the other trades if one trade is not doing well. Allocating money to multiple stocks is a part of the risk mitigation strategy.

b) Set limits for profits as well as losses for every trade

It is a natural human tendency to become greedy for more profits when the trade moves in our direction. Similarly, we are afraid of booking losses when the trading goes against us. While doing intraday trading, you should set aside your emotions of greed and fear. You can do this by defining limits for profits as well as losses by using stop losses.

For example, if you are buying Reliance Industries shares for Rs 2000, you should define a limit of (say) 5% (Rs 100) to protect profits on the upside. So, the moment the RIL share moves up and hits Rs 2,100, you should book profit and close your position. If you become greedy and hold on to your position for more profit, there is a possibility of you making lower profits or even a loss if the share price reverses direction.

Similarly, you should define a limit of (say) 5% (Rs 100) for limiting losses on the downside. So, the moment the RIL share moves down and hits Rs 1900, you should book loss and close your position. If you become fearful and hold on to your position, waiting for the share price to recover, there is a possibility of you making an even bigger loss if the share price continues to slide further.

c) Have limits for daily profits and losses

You should set limits for daily profits and losses. Once you hit the target profit for the day, stop trading. Similarly, if you have reached the maximum loss for the day, you should similarly stop trading for the day. There is no point in trading more and trying to recover the losses. Start over again the next day with a fresh mind.

d) The trend is your friend

You should trade as per the market trend. If the markets are trending higher, identify strong stocks on which you can go long. If the markets are trending lower, identify weak stocks that you can short. Don’t try to go against the market trend as it can result in losses. It’s been said, ‘The trend is your friend.” Go along with it.


Related: How to read candlestick charts for informed decisions in intraday trading?

Indicators for intraday trading

Intraday traders usually use certain technical analysis parameters to decide their trades. Some of these include:

a) Moving average (MA)

The moving average (MA) is the average closing price of a stock over a given period. This period can be 5, 10, 20, 50, 200 days, etc. A line represents the MA on the stock chart. Many traders use the MA parameter to identify buying and selling opportunities in a stock. 

Moving average (MA)

As can be seen in the above image, the blue line represents the MA for Infosys. During May to September, the Infosys share price was above the MA. The green box in the chart represents this. Traders consider this as a buying opportunity. 

On the other hand, in the October to January months, the Infosys share price was below the MA. The red box in the chart represents this. Traders consider this as a selling opportunity.

b) Bollinger Bands (BB)

Bollinger Bands (BB) is more advanced than moving averages (MA) discussed in the previous section. BB includes three lines: MA, upper band, and lower band. Let us see how traders use BB without getting into how the bands are calculated, as that is beyond the scope of this article.

BPCL Bollinger Bands (BB)

The above chart shows that the black line represents the MA, the upper red line represents the upper band, and the lower red line represents the lower band. 

Whenever the stock price touches the upper band, it indicates to the trader that the share price is expensive as it has deviated from the MA. The trader can short (sell) the stock during such times, expecting it to revert to the MA. In the above chart, all such selling opportunities are represented by the downward-pointing arrows.

Similarly, whenever the stock price touches the lower band, it indicates to the trader that the share price is cheap as it has deviated from the MA. The trader can go long (buy) the stock during such times, expecting it to revert to the MA.

The moving average (MA) and Bollinger bands (BA) are just two indicators that traders use to decide their intraday positions. There are other indicators such as relative strength index (RSI), moving average convergence and divergence (MACD), and many more. However, as a trader, you need not know about all of them. As long as you know about a couple of indicators and can use them to profit from them, you are good to go for intraday trading.

Related: Tomorrow Makers’ Comprehensive eBook on Intraday Trading

Last words

You must have read news articles about a trader making a few thousands or lakhs with just a single intraday trade. This kind of news can excite you and tempt you to jump on to the intraday trading bandwagon. But what does not get reported in the news is when some intraday traders lose all their capital and even go into debt. So, do intraday trading with strict stop losses. 

It is understandable to get excited when starting on your intraday investing career, but it is equally important to have a proper risk management plan in place so that your attempts don’t burn a hole in your pocket.

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