Intraday trading, often known as day trading, involves buying and selling stocks within the same trading day. The motivations behind this form of trading are to capitalize on small price moves within the day. To make intraday trading profitable, selecting the right stocks is crucial.
Understanding how to select stocks for intraday trading requires insight into market trends, liquidity, volatility, and the specific technical indicators. This comprehensive guide will delve into these aspects, aiming to simplify the stock selection process for intraday traders.
Understanding Intraday Trading
Intraday trading includes buying stocks with the intent to sell before the closing bell of the market on the same day. The short-term nature of holding stocks makes intraday trading different from investing in stocks for the long term. The primary goal of intraday trading is to earn quick profits by leveraging minor price movements.
Key Factors to Consider When Selecting Stocks for Intraday Trading
1. Liquidity
Liquidity is a vital factor in intraday trading. Liquid stocks allow traders to buy and sell without causing a significant impact on the stock’s price. Stocks with high trading volumes are desirable as they ensure that a trade can be executed promptly. Stocks traded in large volumes make it easier for traders to complete transactions without affecting the stock’s price significantly.
Liquidity can be identified by looking at metrics like average daily trading volume. Stocks with an average daily trading volume of above 500,000 shares often provide the necessary liquidity for smooth transaction flows.
2. Volatility
Volatility refers to the price fluctuation of a stock throughout the day. Stocks with higher volatility can offer more trading opportunities since they regularly move a greater distance from their average price. However, trading highly volatile stocks can be riskier. Traders should look for stocks that have a good balance between volatility and risk, which can be measured by indicators like the Average True Range (ATR).
For example, a stock that usually fluctuates Rs. 10-20 in a day provides more trading opportunities than one that moves Rs. 2-4.
3. Market Trends
Keeping an eye on market trends is necessary. Market sentiment, economic news, and company-specific news can impact stock prices. Using technical analysis, traders can identify trending stocks. Technical indicators like moving averages, Relative Strength Index (RSI), and volume analysis help in understanding if a stock is trending upwards or downwards.
Trending sectors can also be a key factor. When a particular sector is seeing significant interest, stocks within this sector often move in tandem.
4. Technical Indicators
Technical analysis is a cornerstone in selecting stocks for intraday trading. Indicators such as Moving Averages, Bollinger Bands, MACD (Moving Average Convergence Divergence), and RSI can guide buying and selling decisions.
– Moving Averages: Useful for identifying trends.
– Bollinger Bands: Help to see potential breakouts and volatility.
– MACD: Helps to understand momentum.
– RSI: Assesses if a stock is overbought or oversold.
5. Support and Resistance Levels
Identifying support and resistance levels for stocks can help traders make informed decisions. Support levels are price points where a stock tends to stop falling due to demand or buying interest. Resistance levels are where selling pressure tends to emerge.
Understanding these levels can help in setting realistic target prices and stop-loss levels.
Tax on Intraday Trading in India
Taxation is an essential aspect of intraday trading that should not be overlooked. In India, income generated from intraday trading is considered ‘speculative business income’ and is taxed under the heading ‘Income from Business and Profession’.
Calculation Example
Suppose an intraday trader, Amit, engages in intraday trades and generates a profit of INR 2,00,000 in a financial year. The tax on intraday trading is calculated similar to business income.
– Gross Intraday Profit: INR 2,00,000
– Allowable Expenses: INR 20,000 (brokerage fees, internet bills, etc.)
Net Intraday Profit:
Net Intraday Profit = Gross Intraday Profit – Allowable Expenses
Net Intraday Profit = 2,00,000 – 20,000 = 1,80,000
If Amit falls under the 30% tax bracket, the tax calculation would be:
Tax = Net Intraday Profit * 30%
Tax = 1,80,000 * 0.30 = 54,000
Thus, Amit would owe INR 54,000 as tax on his intraday trading profits.
Filing Taxes
Traders must file a return in ITR 3 (for those having income from business/profession). It’s critical to keep detailed records of all intraday trades to ensure accurate calculations.
Practical Considerations and Disclaimer
Intraday trading can be highly lucrative but poses significant risks due to market volatility. It requires adequate research, swift decision-making, and monitoring. Traders should never act on emotions and must follow disciplined strategies. Multiple factors like global markets, domestic economic indicators, and sector-specific news must be analyzed.
It is advisable to use stop-loss orders to limit potential losses. Being disciplined and not deviating from the trading plan is crucial for success in intraday trading.
Disclaimer
Investors must weigh all the pros and cons of trading in the Indian stock market. Intraday trading is inherently risky and not suitable for all investors. Thoroughly research, consider seeking guidance from financial advisors, and make well-informed decisions. This article does not constitute financial advice and is for informational purposes only.
Mastering how to select stocks for intraday trading involves a combination of knowledge, skill, and disciplined execution. By focusing on liquidity, volatility, market trends, technical indicators, and understanding the tax implications, traders can enhance their chances of success while being mindful of the risks involved.