How to identify Best Stocks for Profitable Day Trading

day trading stocksStock markets are expected to perform better than other asset classes. Volatility factor not only increases the risk factor but accordingly increase the return expectations for an investor. This volatility also bring with it, an opportunity to make returns on intraday fluctuation and traders start trying to grab these opportunities. Such traders, also known as day traders or intraday traders, keeps their trades with small targets and stoploss.

Selecting stocks for Day Trading

 

It is important to select the right stock and ride the wave at correct time to make profits. Day traders always keep looking for smallest of the opportunities and also get trapped on the wrong foot. So while initiating trade it is important to be sure. Let us see few ideologies to select stocks for day trading.

Talking about stock selection, there are two school of thoughts – One that says, only one or two stocks should be used for day trading to have better understanding about the movement. The other side says that it is not possible as fluctuations will only be possible with certain event or news hitting the respective company, so each day is a new day and stock selection should be done as per scrip wise market movement.

So which way to go ????

Discussing further the first way – Limited stocks selected with reasonable movement during the trading time will be a right choice. Evaluating the word “reasonable”, it should cover the trasaction cost and then profit target level (excluding transaction costs) should be 2 times the stoploss. Eg. if a stock is valued at Rs.100 and assuming trascation cost to be 10 paisa. The profit target should be Rs.1.00 and stop loss should be Rs.0.30.  {Assumed stoploss level considering 60% accuracy in trades}.

 Result  Profit/Loss (in Rs.)  Trasaction charges  Net Profit/(Loss)
 Trade 1  Success               1.00            (0.10)
 Trade 1  Success               1.00            (0.10)
 Trade 1  Success               1.00            (0.10)
 Trade 1  Success               1.00            (0.10)
 Trade 1  Success               1.00            (0.10)
 Trade 1  Success               1.00            (0.10)
 Trade 1  Stoploss             (0.30)            (0.10)
 Trade 1  Stoploss             (0.30)            (0.10)
 Trade 1  Stoploss             (0.30)            (0.10)
 Trade 1  Stoploss             (0.30)            (0.10)
Total               4.80            (1.00)           5.80

This means that we are talking about 1% to 2% odd movement in a stock on daily basis. Since day trading also seek better liquidity, so it become difficult to find a highly liquid stock with that kind of movement.

And that is the reason, people switch to second way where they keep a track of news and event and change their daily day trading stock. In this way, a trader looks for a stock with movement and try to catch the movement in early stage i.e immediately on market opening.

It is always better to follow a similar type of news or event for better tracking say financial results of companies, large orders to infra, power or software or simply could be currency situation. Few technical traders also look for breakout patterns or oscillators coming out from overbought or oversold zone. Traders generally build a criteria based on market cap, volumes, share price, etc for better selection. Eg. trading in only large cap companies with share price above Rs. 100.

Does Share price also impact selection?

Yes, it do. As most of brokers have implemented minimum brokerage criteria which increase your cost of trade. you must read about Minimum brokerage clause, it may inflate your cost of trading significantly.

Are you still in favour of day trading in limited number of stocks

Although scanning through larger set of stocks may give you more opportuities, but it is always better limit your choices. With fewer stocks selection, you may have a better understanding of the DNA and avoid false indications. A better way to trade could through discount brokers like Zerodhawho charges only Rs.20 per trade or MyValueTrade who takes only Rs. 1000 for unlimited trading in a month. As such, the target and stoploss level may reduce accordingly. It is seen that now a days most day traders are switching to discount brokers for significant reduction in cost and better platforms.

So, whether you select few stock or keep trading in many, it is important to keep your own criteria for selection. The traders are always moves on a thin line between profits and loss, where discipline can only make him succeed.

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