InvestorQ : Can you outline certain different factors that go into stock selection? How exactly should be?
Mary Joseph made post

Can you outline certain different factors that go into stock selection? How exactly should be?

Answer
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Jignesh Gupta answered.
2 years ago


Intraday trading must be restricted to liquid stocks only. You can measure liquidity by the ratio of average daily volumes to market capitalization. It must at least be more than 10%. The moral of the story is that you should be able to execute trades without moving the prices. That means the impact cost must be also low. Also, your trade should not get executed 3 or 4 price ticks away, which could change the economics of your intraday trade. That is what focus on liquidity is all about.
Have you seen stocks that are extremely volatile? It could be due to a variety of reasons. They could be in volatile sectors or they could be owned by a handful of shareholders. Either way, such stocks are best avoided because stop losses could get easily triggered in such volatile stocks. Very volatile stocks are ideally avoided for intraday trading.
Select at least 5 out of 10 stocks that have good correlation with each other. Why do we suggest to do this? The advantage of this approach is that once you have identified one stock, you can replicate that trade in multiple stocks. You are actually playing it smart. High correlation stocks tend to move in tandem and so you are saving yourself a lot of effort in intraday trading.
When it comes to intraday trading, patterns are supreme. Study the past pattern of the stock and try to gauge what the stock price and volumes are trying to tell you. If you have formed an opinion on the stock and if the price is giving a different trend, then you must believe the market trend. Price says it all, so don’t try to outguess the market or outsmart the price. It has something to say. Listen to the market.
Pick stocks that shows clear patterns on the chart and which is tracked by analysts. Why does tracking by analysts matter? You are safe in a stock that is widely tracked. You get a picture of how many upgrades versus downgrades the stock has. That gives you a better base to judge the margin of safety in a stock and you can tweak your intraday trading strategy accordingly. After all, fundamental matter too in intraday trading!