There are around 7000 companies listed on NSE and BSE. You can’t track and trade even 1% of these stocks.
If you select a stock randomly and trade it, chances are high that you will make a loss. Because not all stocks will move significantly daily, and not all stocks behave in the same way.
So it’s important to learn how to pick the right stocks for intraday trading. If you are not picking stocks logically, you are just trading on luck.
In this article, we’ll go through the exact steps that you should follow for selecting stocks, you should know the basics.
Basics to Remember While Picking Stocks
#1. Choose Liquid Stocks
Liquid stocks are stocks that trade in large volumes daily. This means, at any point in time, there are enough buyers and sellers in the market.
You can click on ‘Market Depth’ (available on the chart) during market hours to see the liquidity of a particular stock.
As you can see in the left image below, there are a good number of buyers and sellers which indicates that the stock is liquid. In the right image, there are no buyers and hardly any sellers indicating that the stock is illiquid.
Liquid stocks give you the flexibility to enter or exit a trading position. If the stock is not liquid, then you may not find buyers when you want to sell or you’ll struggle to find sellers when you want to buy a particular stock.
With less-liquid stocks, it is very difficult to use trading strategies. If you are a beginner trader, stick to NIFTY 100 stocks only as these stocks are the most liquid.
#2. Choose Stocks Showing Volatility
Volatility creates variation in stock prices. If a stock is not volatile at all, which means that the price shows little movement, you will not be able to make a profitable trade.
Some stocks move 2-3% daily in either direction and some stocks hardly move daily but spike up or down on some days. You will only be able to capture profit in stocks with price movement, hence select stocks with sufficient volatility.
You can check whether a stock is volatile or not by a simple glance at its price chart.
The following daily chart is an example of a less-liquid and non-volatile stock. As you can see, the price bars are at gaps, indicating that stock is not being traded at every price.
Generally, when a stock is illiquid, the price chart will appear irregular like the one below.
The below chart is an example of a liquid and volatile stock. As you can see the prices are fluctuating almost 30-40 Rs. daily.
The price bars are also long and there are no gaps in between days like the above chart.
Such a stock is good to trade.
#3. Follow a Good News Website/App to Stay Updated With Market Action
You should also keep yourself updated on the big news of global markets.
World markets are now so interlinked that often negative sentiment in one country’s stock market has a ripple effect on other markets as well.
For example, if the DJIA (US Index) or Asian markets crash on a particular day, most likely Indian markets open lower as well.
You can refer to finance portals like Yahoo finance that provide the market dashboard to keep track of world indices.
Check out – How to invest in IPO in India
6 Steps Process to Select Stocks for Intraday Trading
#1. Shortlist 10-15 stocks
Top 3 ways to shortlist stocks for intraday trading.
I. Shortlist stocks with a ‘Fundamental Catalyst’
Stocks that have a fundamental catalyst i.e. some news or announcement, generally turn out to be the trending stocks for the day. So, it is best to trade a ‘trending’ stock with a favorable trade setup.
You can easily find a list of trending stocks from websites like Moneycontrol or Economic Times. They publish a list of trending stocks every morning before market hours.
Pick a few stocks from this list depending on the impact that you think that the news will have on the stock.
For instance, if there is news that a company is getting a huge investment, the stock is likely to react positively to this news. However, if the news is not very material, like a change in the CFO of the company, the stock may not react a lot to the news.
Thus, try to pick stocks where the news is likely to cause significant movement in the stock price.
II. Use a Screener
Another way of picking stocks is by using a stock screener.
You can use the Ticker tape stock screener or Streak to screen stocks based on technical filters.
The technical filters that you apply will depend on your trading strategy.
Some examples of trading filter criteria –
|Volume change||Stocks that have a sudden spike in daily movement indicate that there is heightened interest in the stock which can provide trading opportunities.|
|Sector||There will be times when there could be major news favoring a particular sector. In such instances, you can screen stocks from the sector and keep them on your watchlist. |
For example, the COVID pandemic caused the pharma sector to rally. So you can select pharma stocks that can provide a lot of trading opportunities.
|Technical indicators||You can filter stock based on the technical trading strategy that you want to use. |
For example, many people rely on the RSI indicator to identify stocks that are overbought/oversold. This screener can be handy to filter such stocks.
III. How to Find Volatile Stocks for Day Trading in India
It is not always necessary to pick stocks that are in the news.
You may find many stocks which fluctuate at least 2-3% daily even if there is no news related to these stocks. These stocks are called the “high-beta” stocks.
Due to their volatility, there is scope to make a profit by trading these stocks on any given day.
Remember that you can’t make a profit by randomly trading such stocks. You will need to study the price chart and deploy a proper trading strategy to make a profit in these stocks.
A. How to find the volatility of a stock in NSE
To get a list of the most volatile stocks, you can visit the “NSE’s 50 High Beta Stocks”.page to find a list under the “Index Constituent” button as shown below.
B. How to find the volatility of a stock in BSE
You can also search “top volatile stocks in BSE” on Google and you will get several options to get the list of volatile stocks on the Bombay Stock Exchange. As shown in the snapshot below.
Observe a couple of stocks and make an excel sheet which we’ll discuss in the next section.
#2. Make a Watchlist in Excel
Create a watchlist in Excel after shortlisting the stocks. Also, do a preliminary reading of the price chart and note down your observations.
Your watchlist should look something like this –
When you read the price chart of your selected stocks, try to understand the prevailing trend of the stock by observing the daily chart. Also, try to identify the support and resistance levels.
A support level is the lowest price limit from which a falling stock may bounce back. Because the number of buyers increases when the price touches the lower price level or support level.
Sometimes a stock price breaks the support level and is likely to fall further till the next support.
Similarly, a resistance level is the price point from which the stock may start falling as sellers become active at this level. If an important resistance is broken, the stock price may move up further to create new resistance.
If a stock price is testing a support or resistance level numerous times, the particular level becomes all the more important.
Look at the price chart below for illustration –
#3. Observe Price Action & Make Prediction
I. Observe price action
The first 30 minutes after the market opening is very volatile. The market may move in very unexpected ways during this time so it’s best to steer clear from taking a position at this time.
Spend time observing the price action on the chart. A price action analysis is the absolute must-have skill that you need to have to be able to trade effectively.
II. Make Your Movement Prediction
Based on your analysis of shortlisted stocks, try to predict the movement of the stock. You can predict based on several factors like stock news/announcements, the study of price charts, and technical indicators like Bollinger bands.
Remember that positive or negative news about a particular stock will not necessarily have the expected effect on the stock price. Thus, you need to look at all factors together to make a prediction.
#4. Finalise Stock to Entry
The most ‘favorable trade setup’ would be a stock that is showing a clear trend i.e. either it is clearly going up or going down.
A rule of thumb for intraday day trading is that never trade against the trend.
For instance, if a stock has gone up 10% in a day, do not try to short the stock thinking that it will correct since it has already gone up so much.
Once you have identified a stock showing a clear trend, plan your trade. Use your price action analysis skills to identify an appropriate entry point for the stock.
Timing is very important to make a profit in the trade. Do not blindly enter into a trade.
For instance, the following is the price chart of Wipro after the day it declared results.
It is clear from the chart that the stock reacted very negatively to the results and went into a downtrend. So it presented an opportunity to ‘short’ the stock.
#5. Exit Strategy
Your target profit will depend on the type of trading strategy that you are using. You should clearly define what-if scenarios in your trade plan-
- When to enter the trade
- When to book a profit
- Whether to re-enter a trade after booking profit
- Where to place a stop loss and so on.
Try making a habit of writing down each one of your planned trades on paper. Execute your trade with patience and keeping your emotions completely out of it.
Do not just trade to make money, first try to learn how to trade right. And trading right begins with picking the right stocks.
Because trading by randomly picking stocks is like playing with fire. A few bad trades can wipe out your entire capital.
Hope this article helps you in trading right. Share your experience in the comments below.