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Picking Stocks For Intra-day Trading– The Factors You Need To Consider
Intra-day trading is essentially about purchasing and selling shares within a single trading day. Investors enter and exit this market with the clear intention of booking profits and not taking delivery of the stock purchased. For instance, you can sell a stock in the morning and repurchase it in the evening, if you believe its price may go down. But, your net position, when a trading day ends, is typically zero. Most new investors are often confused about how to pick stocks for intraday trading. Well, there are certain factors that you need to consider before picking stocks. They are as under:
• The liquidity of the stock
The first thing you need to know about how to pick stocks for intraday trading is the market liquidity of stocks. You do not want to enter a stock and worry about how you can exit it, when needed. The problem with liquidity generally exists with smaller stocks, whereas futures and options stocks and midcap stocks are generally quite liquid. You need to understand how liquidity is measured. This can be done by following the below mentioned formula.
Liquidity = Average daily volumes / Market capitalization
As such, the benchmark for considering an intraday trading stock should be a stock with minimum liquidity of 10%.
• The ownership of the stock
Checking out the ownership pattern of a stock is incredibly important. These details are available on websites of the companies owning the stock and on intraday trading indicators. The trading pattern of the stock can also provide clues whether or a not a stock is worth your investment. Stocks that aren’t owned widely among investors are usually more volatile, than those that are widely owned. Such stocks also tend to hit circuit filters quite easily, since market operators are able to corner them for not being widely traded. If you wish to reduce your risk significantly, it is best to opt for liquid, widely traded stocks.
• The chart pattern of the stock
Intra-day traders have to heavily rely on technical charts. Day trading technical analysis is done through these charts. As a trader, it is important for you to be able to develop the ability to read and decipher these charts. You also need to ensure that a stock is depicting a clear chart pattern. It is almost impossible to trade in stocks that do not illustrate clear patterns or those that don’t have sufficient history to back the trade. You need a stock’s history to decipher patterns that can prove helpful in trading, especially when you need to reinvest in a given stock.
• The stock’s ability to sustain narrow tick gaps
Tick is defined as the minimum gap an investor takes between placing two orders. In case of intraday trading, the tick is a rather important criterion. As an investor, you must ensure that there are enough volumes on every tick, for a stock to qualify for intraday trade. You’d rather not place an order, only to realise that it has been executed several ticks away, as it can have a huge impact on your order. The idea here is to capitalise on trends, while placing market orders. As such the tick gap is important for selecting intraday trading stocks. Remember, a smaller tick gap is always better.
Now that you know how to pick stocks for day trading in India, keep these in mind before executing trades. If you are a new investor, you should take help from a financial advisor who can provide adequate guidance for day trading.
Maithili Pawar is a financial expert with 5 years of experience in investment banking field. In her free time, she writes on trading topics. In this, she has written on how to choose stocks for intraday trading. She has listed the factors
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