Raghunandan Money – Investment Khushiyon Ka.

As a beginner how to choose stocks for day trading

Published : October 25, 2019

How to choose stocks for day trading - a beginners guide

Day trading turns profitable only when you trade with discipline. And discipline comes with the practice of patients and overcoming greed and fear in the market. Day trading as a business is a very good option for self-employment even if you have a very low capital base. It is a fact that very few make success as a day trader, due to the above mentioned dual truth. Trust me, trading rewards those who train themselves to cut their losses on time, while making the trade in the market.

Why do most day traders fail?

Not to mention, one of the many reasons why most of those coming to become a day trader fails is the fact that they choose poor stocks for day trading business. Technically speaking every stock have a specific day trading characteristics. As a day trader, you must have a very keen eye to pick stocks that are right for strategizing day trades.

Do remember that choosing stock for day trading is not a one time exercise You will need to change your portfolio of stocks for day trading quite often. Now the question is how you will choose your stocks for day trading and at the same time how you will decide that it is the right time to update your day trading stocks portfolio. You will get to know both these critical aspects to make your day trading an all-time success, as I will proceed further deeper into the matter.

Choosing stocks for day trading – the mantra for success

The golden rule to pick a stock for day trading is keeping track of stocks with high volume as well as volatility. Now here comes the tricky part. Both volume and volatility for a stock could be possible for many short term reasons. Short term reason like some rumours pertaining to something good for the particular business that might help businesses earn extraordinary revenues in coming quarters.

A stock with historically low volume and volatility may turn out to be high in both of them due to such instances. So you need to be very cautious in dealing with such a situation. As a beginner, you must not fall prey of such stock for your day trading strategy.

How to pick the right stock for successful day trade?

Thus, you will need to do some maths in order to pick the right stock for day trading. The time tested method is that see for stocks that are trading over and above industry average volume for quite some time, say for a few weeks. Similarly, with the volatility.

Once your industry wise list of stocks with high volume is ready, the next is to screen those stocks for high volatility. Volatility simply means that there are more ups and downs in the price of a stock during the day trading window. Prefer those stocks that tend to exhibit high or rising weekly volatility in your list.

Why you must have more than one stock in your day trading portfolio

Diversity is not only good for an investment portfolio, but it is also good for a day trading portfolio. A portfolio stocks form  3-4 different industry will be sufficient to start with.

Keep in mind that you will also diversify across industry groups. It simply means that, for instance, if one stock you picked from the auto sector than do not pick another stock from the auto ancillary sector. Pick from banking or heavy industry or metal sector, or likewise.

Thus, avoid making day trading portfolio of related sector stocks. This is your second mantra for becoming a successful day trader. No matter even if your beginning your career as a day trader.

Bid-ask spread of stocks – Why important for day trade?

In order to reap healthy and regular profits from your day trading business, the next important thing that you need to keep in mind while picking stocks is that of spread. The difference between the bid and the asking price of a stock during trading hours is spread.

Lower the spread better the opportunity you will get to exit or enter at the right time. High spread trade might be good for swing trading and is surely not for day trading.

Day trading on gut-feeling – is it a right day trading strategy?

Know you understand that there is science behind a successful day trading. And also the above discussion might be suggesting a trading business to be a risky one. This requires a special knowledge base and skill set to be successful. Yes, you get right.

This is very much true and this differentiates trading from a casino or gambling. If you want to be a successful day trader, then forget permanently to make the big win. Big win by betting your money on your gut feelings. Rather, make a habit to enhance your knowledge base regularly.

Also, do your homework before making any actual trade. Proper knowledge with patience is the key mantra for day trading success.

A simple yet strong basis of cherrypicking day trading stock 

Stocks with high volume, high volatility along with low spread is the basis for stock picking. Daily at the end of the market hours, you will need to update your stocks portfolio sheet.

This is necessary for the next trading day. Look for any changes in the above three for a consecutive three trading days. This will be enough to replace that stock. You will now need a new trading stock but with the same characteristics for your day trading portfolio.

What else to care while day trading as a beginner?

As a beginner to day trading, it is always good to book a small profit. Do not wait for a large chunk of profits. But keep in mind the costs associated with buying and selling stocks. Check with broker beforehand to come up with exact cost associated per stock. This will give you an exact idea of where to exit your trade. So that you still make a profit after adjusting all costs associated with the trade.

Also, keep track of the news of the stocks in your trading portfolio. You need to become smart enough to extract the short term impact of any such news. Believe me, if you do so, you will be good at coming up with the daily trend in that stock well in advance.

All the above information regarding every stock’s sector-wise is available on the website of both NSE and BSE. If you avoid future of the stocks as a beginner, it will be good for you. Future day trading involves some more advanced knowledge. This I hope you will understand once you become comfortable with trading in cash scrips.

I will be covering the basic strategy of selecting stocks for future trading in another blog soon.

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