Stock picking rules for intraday trading

Improve your stock picks with these intraday trading rules

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Have you been wanting to dip your toes into the world of intraday trading? Traditionally, intraday trading has been associated with professional traders who have a thorough knowledge of finance and the stock market. However, the shift to online trading has brought about a huge transformation. Today, you do not need to be a professional trader or seasoned investor to try your hands at intraday trading. Put in the time to educate yourself about the intraday trading rules and get a little practice under your belt. Soon, you too could become a successful intraday trader.

Take a peek into the daily routines of seasoned day traders. You will find that they spend a lot of time doing research and running analysis. They have to, for while the potential for returns is high, there are also risks. How do you safeguard yourself against these risks when starting your intraday trading journey? Be mindful of the common intraday trading rules when selecting stocks and executing trades.

Basics of intraday trading

Intraday trading is the trading of stocks within the same trading day. Traders buy stocks not for the purpose of investment but to earn profits by capitalising on stock price movements.

Unlike in regular trading, day traders do not own the shares for they do not take delivery of them. They simply take positions and square off those positions before the markets close for the day. Intraday traders cannot hold shares overnight. If a trader does not close positions by the end of business hours, their broker will automatically square off those positions before the closing bell rings. Regular traders, on the other hand, can hold shares for anywhere from a couple of days to several years.

While there are risks in intraday trading, there is also a greater potential for returns. Besides, day traders enjoy higher margins and lower brokerage charges than regular traders do.

Intraday trading rules to help with your stock picks

There is so much to factor in when you engage in intraday trading. Here are five intraday trading rules to set you on the right track:

  • Rule # 1: Prioritise liquid stocks

Liquid stocks, such as the shares of large-cap companies, are traded in large volumes. If you take a position in such a stock when the markets open, it becomes easier to find a seller or buyer later in the day when you need to square off your position. Since the demand for mid-cap and small-cap stocks is lower, squaring off positions before market close tends to be harder.

  • Rule #2: Factor in volatility

Day traders make money off the price fluctuations in stocks. When choosing a stock, they make sure to pick stocks with medium to high volatility. Higher volatility indicates that the price may see sharper rises and falls. Remember, intraday trading is not about playing it safe. Rather, it is about profiting off that volatility.

  • Rule #3: Choose stocks that follow their group

Identify stocks that tend to move with the general trend within their sector, segment, or index. The prices of these stocks fluctuate in correlation with their group. This makes it easier to predict their movements. For example, consider the strength of the rupee against the United States (US) dollar. When the value of the rupee rises, software companies which are dependent on US markets may see a dip in earnings because of changes in the foreign exchange rate.

  • Rule #4: Shadow the trend

Moving with the trend is generally a good idea. When the market is bullish, intraday traders can profit by trading in stocks that are likely to appreciate. In a bearish market, however, the trader should identify and take positions in stocks that may decline.

  • Rule #5: Don’t scrimp on intraday research

Intraday trading has its risks, but sufficient research can help you to pick out the best stocks. Start by listing out liquid stocks from a few different sectors. Once you have your wish-list in place, carry out daily market and trends analysis. Despite what people may tell you, intraday trading is not the place to go with your gut. Use the tools available to you to carry out technical research and make the right choices.

Summing up

Intraday trading involves discipline, knowledge, and skill. If you are new to the business of day trading, you may be confused by the abundance of available data. For newbies, it may help to open an account with a large broker like Kotak Securities that provides an extensive range of educational resources. Use the tools available to you to cut through the noise and pinpoint the patterns. Find a way to capitalise on the trends. Rather than take pride in your instincts, use the intraday trading rules to put together a comprehensive strategy, complete with entry and exit policies. The right plan will set you on the road to day trading success.