For a day trader, it is vital to select the right stocks. A little mistake, and one can incur heavy losses within a few hours. At the same time, the right choice of stocks can help you earn more than average ROI.
With this in mind, given below are the top tips to help you identify the best stocks for intra-day trading.
1. Play it safe – trade only in liquid stocks
Ever wondered what can be the best tip given to a typical day trader to pick the right stocks? You can sum it up in one word – liquidity! The advantage of liquid stocks is that you can buy them in large quantities and sell without a significant effect on the price. It is often the case that less liquid stocks fail to provide traders with the chance to buy and sell more substantial quantities, due to the absence of a large number of buyers.
While some traders believe that illiquid stocks yield higher opportunities due to rapid price modifications, statistics show otherwise. With illiquid stocks, there are higher movements over a short period, and most of the possible gains dissipate, and the downside looms large.
2. Trade-in good correlation stocks – go for those that have a higher correlation with major sectors and indices
This advice is one of the best tips for an intra-day trader. The right stocks are those that have a higher correlation with major sectors and indices. You see, stock price increases corresponding with the upward movement of the index or the sector. That said, stocks that move and correlate with the group’s sentiment turn out to be reliable and follow the sector’s expected movement.
For instance, if the Indian Rupee strengthens against the Dollar, it will affect all information technology companies that depend on the US markets. A stronger rupee indicates lower earnings for the IT companies. Accordingly, a weakening rupee implies higher export incomes for the companies mentioned above.
3. Pick your stocks after research
Quality research is the key to pick the right stocks. Nothing can be more assuring than knowing about the stocks you are going to trade. Unfortunately, most traders neglect doing sufficient research before picking a stock. It is due to either ignorance about the importance of research or pure negligence, and it is both in most cases.
Being informed will result in the capacity to execute a trade with speed. As an intra-day trader, you will earn profits by leveraging small price fluctuations during the fixed trading hours. Thus, making quick decisions is highly critical to generate a decent ROI.
4. Cultivate the capacity to read charts on your own
It will be highly advantageous if you know that you will depend on technical charts from day one as an intra-day trader. In this line of business, you taste the waters through charts. They are like the barometer for sensing what goes around, what works, and what does not. To that end, the capacity to read charts is a very critical skill.
Considering that you have developed the skill to read and decipher charts, it is of utmost importance to make sure that the stocks you set your eyes on project definite chart patterns. It is not advisable to trade in a stock that lacks sufficient history, nor should you opt for stocks that do not showcase a clear pattern. Stocks with a long history can help you discern patterns and trade for a repeat of the said patterns.
5. Do not challenge the market– ride the trend of the day
A good number of traders may pursue contrarian plays. But the majority of the trading world prefers to ride the waves of the market. This process is done by spotting the waves of the market trend and riding it.
To give you a clear picture, when you notice that the market is rising, you should opt for stocks that allow you to hold your position for a more extended period. On the contrary, if the market is falling, you should consider short positions.
Intra-day trading is an entirely different game. To come out on top, you need to know the rules and the trends that define the market. The age-old wisdom suggests continuous learning and upping your knowledge and awareness. It is vital to have the knowledge and skill to execute the perfect trade. After all, you are trading to earn profits. As such, the surest way to ensure that is by knowing everything about the stocks you are going to buy and trade.