Are you an intraday trader looking to maximise your profits and minimise your risks using the best account for intraday trading. If so, you’re in the right place! Intraday trading can be an exhilarating and potentially profitable form of trading, but it’s not without its challenges. Perhaps the single most important factor of successful intraday trading — other than your trading psychology — involves choosing the right stocks to trade. In this in-depth guide, we’ll explore three essential principles for intraday stock selection that will help you choose the stocks that are best for your intraday trading strategy.
Liquidity is king
When it comes to intraday trading, liquidity is paramount. Liquidity refers to the ease with which a stock can be bought or sold without significantly moving its price. Highly liquid stocks are those with a high trading volume and a narrow bid-ask spread, making it easy to enter and exit positions quickly.
Why is liquidity so important for intraday traders? It’s encapsulated in the name. Intraday traders are focused on profiting from short-term price movements and as a result, they place much shorter trades, often opening and closing positions each day or is an intraday trading requirement. With such a fast timescale, the ability to buy and sell stocks quickly and seamlessly is crucial. This means, for the most part, avoiding the phenomenon of slippage, where your trade executes at an unexpected price. The more liquid a stock, the tighter the spread, and the less chance of slippage.
On the other hand, highly liquid stocks offer a great deal of flexibility to intraday traders. Using level 2 data, intraday traders can better see the supply and demand of the stock which will help them better determine the stock’s direction.
Highly liquid stocks can offer the following advantages to intraday traders:
Tight bid-ask spreads: Highly liquid Stocks tend to have relatively tight bid-ask spreads, so you will spend less to enter and exit your positions.
Fast execution: Quick order fills mean you can capitalise on short-lived opportunities and implement stop-loss orders without much risk.
Price stability: Heavy volume, especially in large-cap stocks, ETFs, and major indices, usually leads to quick, accurate execution at the desired price. So, there’s little to no slippage based on larger orders and large traders moving in and out of the stock.
Volatility is your friend
As an intraday trader, you need to trade stocks that have ample volume – or are highly liquid – alongside more price movements – or volatile. This permits you to get in and out of a stock at good prices in normal market conditions. Price movements are opportunities that you can trade on when the stock’s price moves up and down in a short period.
Imagine a stock that doesn’t move all day – it would be incredibly difficult to make a profit or any profits at all, as an intraday trader. On the other hand, a stock with wild swings would be very difficult to buy profitably and sell – much less short. However, since on the short side profit is made when it moves to the downside, you’ll want to buy some at a price that you can cover at the stock if the stock finally moves lower. Get it right and all that chaotic “noise” may turn out to have been a signal. Highly volatile stocks are ones with extreme daily up-and-down movements and wide intraday price ranges.
What makes a stock suitable for intraday trading? Here are a few characteristics that volatile stocks often possess:
High beta: Beta measures a stock’s volatility relative to the broader market. Stocks with a beta greater than 1 are more volatile than the average market, some of which may be more suitable for day trading.
News and event catalysts: Stocks that move on news, earnings releases, or other event catalysts can experience rapid price movements and heightened volatility, which creates trading opportunities for intraday traders.
Sector or industry volatility: Certain sectors or industries face headwinds that lead to higher levels of volatility — think oil and gas or biotech companies, or fast-growing technology sectors. Present and future volatility in these sectors could lead to trades with opportunities for big profits.
At the same time, remember that excessive unpredictable volatility can expose you to unnecessary risk. Some might argue that exorbitant volatility ultimately results in numerous opportunities to generate profits — which may outweigh the risks it suggests.
Technical analysis is your guide
The first two principles may seem relatively simple, but trading is not easy. Many outside factors can influence price movement and as such, many people are seeking a system that will tell you everything you need to know, with absolute certainty, to be a successful intraday trader. Unfortunately, this isn’t possible. Realistically, applying this type of “magic bullet” will likely end with you as one of the new traders who don’t stick with it long.
However, few % are increasingly turning towards the power of technical analysis – the study of past price movements and patterns to predict future price behaviour. Technical analysis is based on the premise that stock prices are not random, but rather follow identifiable patterns and trends. By identifying these patterns and how they occur, intraday traders can start to make much better trades based on more real-world data. This allows them to buy low, then sell high, or sell high and buy low if they think the market will fall. Each of these signs is an indicator and in isolation, they’re useless. Traders start with loads of different tools and because they can slant the inputs and rules for each, no two traders will be the same.
Here are a few of the most popular technical analysis tools used to construct the parameters of an ideal stock for intraday trading:
Candlestick patterns – Price changes can be seen visually on candlestick charts, and specific candlestick patterns may indicate possible points of reversal or continuation.
Moving averages – Moving averages smooth out price data to identify trends and potential support and resistance levels. The exponential moving average (EMA) and the simple moving average (SMA) are two common types of moving averages.
Oscillators – Oscillators like the Relative Strength Index ( RSI) and the Stochastic Oscillator help identify overbought or oversold conditions, which can signal potential reversals and trend continuations.
Fibonacci retracements – Based on the Fibonacci sequence, these retracement levels can help identify potential support or resistance levels and potential entry and exit points for trades.
There’s a caveat with all of these. Technical analysis is incredibly useful to traders – although it’s more of an art form than a science – and it can get tough deciding which indicators to use. While it’s usually a good idea to stick with one, having multiple indicators “confirm” the same signal can help you make even better trades. However, don’t go crazy and start adding 10 different technical analysis tools to your strategy because the last one isn’t signalling. Remember it’s a good idea to combine technical indicators with even more advanced principles, like liquidity analysis and market conditions. As with any art or discipline, it takes a bit of practice to become good at trading, but just like anything else, the more effort you put into perfecting your consistency, the better you become.
Conclusion
Intraday trading is an exciting and potentially profitable endeavour using the best intraday demat account although, as with all types of trading, it comes with its risks. Just by sticking the odds to your favour and favouring the stocks that are showing the greatest probability of producing robust profits and competing with a strategy where winning trades outpace losing one’s by a margin, you can look to potentially make many dollars in the stock market every day with a little luck.
