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Important factors to consider while intraday trading

An intraday trader opens and closes stock market trades within a single trading day. This means the window for intraday trading is quite small. Theaim is to profit from the changes in share pricesbefore the markets close for the day. To achieve thisobjective, traders have to keep in mind certain key factors while online share trading.

Important factors for intraday trading

A good trading strategy holds the key to successful intraday trading for beginners and seasoned investors. To create this strategy, you shouldbe familiar with the following aspects:

  1. Liquidity

Intraday traders factor in liquidity during online share trading. As a thumb rule, it is good practice to maintain a liquidity ratio of at least 10%. To calculate the liquidity of a stock, divideits average daily trading volume by its market capitalisation. When you apply this formula, you will find that large-cap and higher-end mid-cap stocks are usually more liquid. Such stocks are traded extensively each day, allowing intraday traders more opportunities to exit trades under favourable conditions. Smaller stocks tend to be less liquid, and so, may be harder to exit within a single trading day.

  1. Impact cost

This is the transaction cost of buying a specific stock. The impact cost is linked to market liquidity and varies based on different transaction sizes. You should look for stocks with a low impact cost. Otherwise, if the impact cost is too high, it could eat into your profits, especially in case of large orders. Notably, stocks that qualify for inclusion in the Nifty 50 have to meet certain impact cost restrictions.

  1. Ownership pattern

Intraday trading for beginners and experienced day traders has a lot to do with risk reduction. One way to reduce risk is by choosing stocks that are widely owned. These are more liquid and therefore less risky for day traders. Stocks with restricted ownership patterns tend to be more volatile. You can check up on the ownership patterns of different stocks on the stock exchange website.

  1. Tick spread

This is the minimum change permitted in the stock price during trades. If you wish to buy or sell a stock, you will have to update the order by at least the tick size. Small tick spreads suggest that market activity and trading volumes are high. This is good news for intraday traders, as the orders can be closed at favourable prices. When a tick spread is large, however, it signifies a higher change between the bid and ask prices. In such a case, day traders may struggleto exit the trade profitably.

  1. Chart patterns

Technical charts cansignal how a stock is moving and what trends you could expect. Stocks that are new on the exchange may not have much of a history.So, you may not be able to derive patterns from their charts. But if the stock has been trading on the exchange for some time, technical charts could provide you with valuable insights. Look for stocks that have clear patterns, as these will help you to assess if particular tendencies are likely to be repeated.

  1. News sensitivity

Keep abreast of the latest news to maximise your stock market returns. Intraday traders should look for stocks that react to news—the price fluctuations will mirror their news sensitivity. You can then adapt your trading strategy to make the most of the changing prices.

Conclusion

Keep these factors in mind whenever you engage in intraday trading. It may also help to open a trading account with an established broker like Kotak Securities. You would then gain easy access to research reports, technical charts, and many other resources that help you make the right choices in the stock market.

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