Day traders buy and sell securities on the same day to make a profit. In this scenario, no delivery is involved. When you open a position to buy shares, your ultimate goal is to sell before the market closes. For this to happen, the prices must increase. Discover six tips to help you spot the most promising stocks if you are based in India.
How to Trade Wisely
Choosing the right securities is crucial. After all, you will only have a few hours before squaring off the transaction. One bad decision can lead to substantial losses. The most favourable stocks have the following characteristics:
- High Demand
These instruments are liquid, so many trades are happening throughout the day. As a result, there is no problem for a buyer to find a seller and vice versa. Transactions are performed without delays — you do not have to wait for a match.
- Price Fluctuations
The price of the shares must change dramatically enough to ensure profit. If the instrument is not moving anywhere, there is no chance to cash in. The fundamental logic is: buy low and sell high. It works in many related realms, such as forex trading.
- Market Trends
You need evidence showing that the market is doing well and the shares are likely to appreciate. If you perform stocks trading through regulated brokers like Forextime, the company provides a wealth of free resources to help you build the right skill set.
In addition to broad swings, you ought to pay attention to more narrow sector trends. In recent years, day traders have also been focusing on momentum. Technical analysis remains the default choice for buyers and sellers. Now, let’s examine each factor in more detail.
- How Liquid Is the Stock?
As we have explained, highly liquid instruments are easier to buy and sell. Besides, they are usually traded in larger volumes. You can manage large quantities of these shares without affecting the stock price.
Note that liquidity may vary at different price levels. Superficial research is insufficient. Avoid rash decisions. You may notice that some stocks are highly liquid at the lowest prices. However, above a certain level, their volumes begin to drop.
- How Volatile Is the Instrument?
Volatility is the primary condition for profit. Focus on medium to high levels. A rule of thumb is to pick stocks that change by around 3-5% either way. If your instrument is volatile, you may place more orders throughout the day to reap higher profits. However, purchasing highly volatile securities may be counterproductive if their drop/rise is too steep.
- Examine Market Trends
Stock markets are driven by a plethora of factors, primarily economic and political. They move upward or downward, while stock prices change as well. Shares may be correlated positively or negatively. When the market rises, they appreciate or depreciate, respectively.
- Sector Trends
Do not limit your analysis to the sector your current choice belongs to. Is it oil and gas, technology, pharmaceuticals, banking, or something else? A day trader must keep abreast of the latest developments across economic sectors. They pick shares from the ones that have been consolidating. Look for signs of an impending breakout.
What if you notice that particular stocks have made huge gains but missed the opportunity? Shift your focus to peer stocks from the same sector. Pick those which are also likely to break out.
- Momentum of Stocks
The term ‘momentum’ describes how quickly the price of stock changes over a particular period. It shows you how strong the current uptrend or downtrend is. A ‘momentum stock’ is the one that moves along with the strength of the momentum. In an upward trend, you go long. In a downward trend, you go short. Naturally, this is not the only indicator to consider.
- Technical Analysis
Technical analysis includes a range of strategies that prove helpful. Look at the graphs to spot buy and sell signals. For example, gaps in stock prices in either direction may be your lucrative opportunities. Support and resistance are also telling. You may zoom in on stocks that are breaking their levels.
The Bottom Line
Picking the right stocks could be a challenge. For day traders, these decisions are crucial. These six tips are fundamental conditions for success. Develop your expertise and stay objective. Make sure your actions are data-driven, not emotional. Day traders cannot afford to be irrational.
