Day Trading – How to Select The Right Stock for Day Trading?

I often get this question about how to select the right stocks for anything from day trading to find the right pattern to find the wealth-building opportunities and many others.

So let me answer the question about how to find the right stock for day trading. Moreover, why everyone should avoid day trading, how to go about doing day trading for those who still want to do it. Even if you don’t want to be day trading, knowing how traders are using it can help you invest at a better price on any given day.

Why People Actually Day Trade?

There are mainly three reasons why people prefer day trading:

1. Leverage position with margin: I don’t recommend margin trading because it can lead to disasters, and if one of your reason to opt for day trading is margin, you should know the consequences of it.
2. Lower Brokerage: At times, people don’t take a delivery position because they may need to pay high brokerage (calculate brokerage on the fly). They don’t expect to be gaining if they hold the position for a day, and so instead of loosing on the brokerage, they prefer to be squaring the position off.
3. Short Selling: Cannot short sell in the cash market segment in India and have to square off your position the same day unless you are shorting in futures or options (in foreign markets you can short sell in the cash market as well).

I could not find any other valid reason to be day trading. For me, trading has never been for the above purposes.

My Simple Trading Formula

I prefer to buy a stock where I am fine entering at a level where I can execute my stop loss. Then I can wait for the target. In either case, I will either lose executing the stop loss or win by hitting the target.

To be profitable in the market, I have to outnumber my wins over my losses. Moreover, one should outperform the performance of the amount in case of wins over the losses.

I prefer to keep trading simple, so I can focus more on the charts than anything else.

Once you trade with this, I don’t see how you can be doing day trading or any time-wise trading at all. You will more often trade based on price targets and gain and loss and not based on time, like day trading or weekly trading.

Stocks Overlap in Various List

The list of stocks for day trading, as well as positional trading, can be overlapping. Moreover, they also are the same stock I invest in as well. My list of stock for positional trading and investment are overlapping as well.

Why not trade in fundamentally sound stocks?

The trading entry point will be different from the entry for my long term investment.

As an example, I purchased Tata Steel in February for my wealth-building portfolio when it was grinding lower but was above the support levels (You cannot take the trader out of you) because it was an investment.

However, I avoid taking a long position on a day if the stock is taking such a beating. The entry will be more on a breakout above certain levels or even in the leg up after the formation of W.

Let me share a trade. Blue arrows are entry and exit points.

Decisive breakout in Hero Moto Corp above 2700 and trading around 2800 was an entry point for my trade with a stop loss around 2720. Entered at 2832 on March 8th, took the dividend of 40 Rs, and was out of the stock at 2965 on 4th April. The stop loss of 110 Rs and gain of roughly 160 Rs.

Will Hero Moto Corp be part of my wealth building? Ideally, NO, as of now, because it has a declining market share compared to Honda Motors. Moreover, they have no product, which can be termed as unique when comparing to Honda (had good USP when compared to TVS and Bajaj earlier).

But that does not mean it will never be part of my wealth-building portfolio. It can be if it can gain market share, or it is available at a lower price to earnings or price to book in the future, and I am in and out of it.

An example of a stock which is in my trading list but not in my wealth-building list. Stocks that are fundamentally good (Zydus Wellness from January Wealth Building Report) but avoid them for low volumes from my trading list.

Stocks like L&T, Infosys will be in my both the lists.

Why Should One Avoid Day Trading?

I am not a fan of day trading for the simple reason; day trading is for those who want to take on the leverage and trade in the market. As far as I believe, it is a path to disaster. I am never a fan of margins and have been shouting my lungs out for years to avoid leverage, especially on day trades.

Even if you know what you are doing, it is not something that can help you build wealth in the long run.

The mains reason being:

• Timing the Market – Day trading is about timing the entry and exit in the market in a smarter way. For one successful trade, you have to be right twice a day. It isn’t about the right stock or right price, but it is merely about the right time. However, you have to be lucky more than once in a day, which makes too many odds stacked against the day trader to get it right in a short period.
• Unsatisfied Mindset – Day traders are seldom satisfied. The reason being, it is a product that is to make you disappoint and dissatisfied. Even for the experienced day trader, the gain of 2% on a given day isn’t satisfying enough because the fluctuation in the price after the entry or exit or both makes it feel a miss of an extra 1% could have been readily cashed in. The focus shifts from gains a trader achieved to the misses.
• Making the most of Next Trades – With an unsatisfied mindset, one can never make better decisions. The next morning trying to make that extra, the trader wants to make the most of the next opportunity. Taking far more risk and let the profits ride. Soon gains are followed by more substantial losses.

So, it is a product that makes the market more liquid but doesn’t help anyone build wealth. So I always avoid day trading, but as and when I fund opportunity in the stocks I own, I am fine making some extra selling and buying at lower levels or so. If you want to make money in the market, avoid day trading, and focus on price action in the fundamentally good stocks.

Still, for those who want to day trade, here is how to build a list of stocks for day trading.

How to Build a List of Stock for Day Trading?

If you want to be building your list of stocks for day trading, here is 5 point strategy.

1. Volume: Opt for stocks that trade with good volumes. If you opt for low volume stock, you can have issues getting out of your positions quickly.
2. Price: Penny stocks under Rs 20 and stocks above Rs 1250 has never been good for day trading. I would have loved to short penny stocks, but then I prefer trading only in the cash market, and so long positions don’t work for me in those stocks.
3. High Beta: Opt for stocks that have high volatility and have a higher intraday swing. Stocks above 1250 often have a lower beta, and so they are not preferred for day trading.
4. Sectorial News: Stock specific news may not work because you could be late in reacting to it, but the news around the sector can be used to trade in particular stocks on any given day.
5. Earnings Calendar: You can always get the earnings day for the stock in advance, and though I prefer runup to the news pattern, it is also good to use the earnings to trade in the given stock.

I am not a day trader, but I do day trading in my long term portfolio where I sell off my position based on any news and may repurchase it the same day or a few days later to book profit in my long term portfolio.

How to Day Trade?

Once you have a list of stocks for day trading, here are tips to be doing day trading the better way.

1. Less is More: Day trading is not about tracking all the stocks in the news and trading in each of them. Have a list that you want to be focusing on and don’t go for more than one to two stocks for the day. It is not humanly possible.
2. Start early: Day traders will always start soon. You will find a lot of news channel describing stocks that are in the news on that given day and if you have a list of your stocks that is in the news or want to analyze a stock to add it to your list, do that before the market starts.
3. Follow the Trend: Trade strong stocks in an uptrend, weak stocks in a downtrend. It is quite simple, but then people always look for a trend reversal, and I prefer to keep it simple. It’s blindly apparent, but still many people miss it.
4. Book Profits: Even in day trading, you should have your target and stop loss and so try to cut your losses and try to book profits. Trading is all about booking losses and making profits and outnumbering the gain over the losses.
5. Take a Break: At times, you may not realize, but things don’t often work well in a series of trade, and this happens to the best of the traders as well. It is better to be stepping aside and see things from the sidelines than to just put more effort into it and try to turn things around.

Final Thoughts

If you cannot day trade, that’s all ok, and I am not able to either. I have blogs, forums, do freelancing, and consulting for my clients and is involved in many other ventures. I cannot be sitting in front of the terminal whole day, but then if you can, do it the right way.