Intraday trading can be a very risky business. As a trader, you will need to make money from daily price fluctuations. You must be able to choose the best stocks at the correct time and then buy/sell at the opportune moment.
How do you choose the best stocks to trade? For intraday stock selection, experienced traders use certain rules that consider factors like volatility, liquidity, market trends, and volume.
Consider these factors when choosing stocks for intraday trading.
Liquidity
Before you enter the market, it is important to check that the stock has liquidity. You may have difficulty finding buyers or sellers of certain stocks. These stocks are called illiquid. You need to be able to react quickly as an intraday trader. It is, therefore, important that you can easily trade the stocks.
Volatility
Trading opportunities increase with volatility. You can trade intraday price swings to try and generate profits. Picking stocks with high volatility (but not excessive) can be advantageous.
Volatility is also affected by the level of uncertainty in the market. To prevent losses from eroding potential gains, it is important to set stop-loss limits.
Volumes
Volume is another important factor to consider when trading stocks. Volumes are the number of transactions or purchases and sales that occur during a trading day. Look for stocks that have high trading volumes. High volumes are a sign of increased interest in the stock. Trade Volume Index (TVI) helps day traders make decisions on whether to buy or sell.
Trend
Stock prices follow a general trend, as we’ve seen. Stock prices may continue to rise until they reach a certain level and then start to fall. Successful traders can profit from these price waves.
You can buy on an upward trend in the hope that prices will continue to rise. In the event of a downward trend, you can sell short, hoping that the price will continue to drop. Stocks that move in a certain direction are good for trading.
Strong and weak stocks should be checked.
It is important to select strong stocks from among volatile, liquid, and trend-following stocks. This point was briefly covered in the previous chapter. Strong stocks will follow the market trend but do so more aggressively. If the overall market trend is up, then these stocks will also rise more intensely. Weak stocks are those that rise or fall with the market trend but with less intensity or at a slower pace.
Use the relative strength indicator (RS), not to be mistaken with the relative strength index (RSI), to monitor a stock’s performance compared to a benchmark index.
The market does not always move in a trend. The market can be indecisive at times. Stocks are not moving much. It is best to be patient during such periods and wait for the stock market to start trending again.
Never challenge the market; always ride with the tide
You must follow the market trend as an intraday trader. It is best to avoid a stock if the trend of the market does not match your analysis or strategy. It is safer to go with the flow and not against it. Avoid holding onto stock based on mere hopes.
It is also possible to benefit from a contrarian or anti-trend approach. You buy when others are selling, and you sell when they are buying. This could be a good thing. It’s better to follow the current.
Timing
Timing is key to maximizing profits. You must make quick decisions when buying or selling stocks. It is best to buy stocks which are on the rise and then sell them at a price slightly higher than previous highs of the trend. You can book profits in a downtrend when the stock price falls below the prior low.
Square Off Your Open Positions
Day traders should close or square all positions before the end of the trading day. It is important to close all positions before the market closes for the day. Day traders take positions or buy and sell stocks with the intention of trading intraday based on trends in the market or technical analysis. Holding positions beyond a single day is not recommended unless stock fundamentals are solid.
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