How to select best stocks and sectors for Intraday and Options trading?
Indexes like NIFTY and Bank NIFTY are happy hunting grounds for intraday and options traders – no doubt about that! In fact, beginners are advised to start trading in NIFTY.
But we can also do trading in individual stocks too. However, that’s not as easy or safe as it sounds. As a trader we need to develop and eye to sort out stocks that are “worthy enough” for trading. This is what we intend to do in this article – we will share a few tips and pointers that may help you out in this regard.
- Select the appropriate Sector
- Select the appropriate Stock
Select the appropriate Sector
The first thing you should do is to select the appropriate sector. You should choose a sector that may show enough price movement.
For intraday trading we aim to select stocks that show enough price movement. If a sector is moving a lot more than the market in general, then there’s a good chance that many stocks in it will be worth trading in.
Also note that, if a sector performs better than the general market, i.e. if it shows better upward price movement as compared to the market average, we call that sector to be having strength. That’s what we want in intraday trading.
However, in options trading we are just concerned with price movement – upwards or downwards. That’s because in options trading we can earn profits even if the price falls. So, we can buy/sell options in a sector that is performing worse than the general market, i.e. if it shows more downward price movement as compared to the market average (such sector is said to be performing weak).
There are many software available in the market that may tell you about the relative strengths of various sectors on a daily, weekly or monthly basis. You will also get this information easily if you are following any business-news media source, electronic or print.
Selecting a sector first and then the stock is called top-down approach. Some traders just choose the stocks they like directly, as after all we invest in a stock, not in the whole sector as a whole. This approach is called bottom-up. There are some stocks that do not fall under any major sector as such and so we need to analyse them independently.
Select the appropriate Stock
In intraday trading and options trading, we aim to select a stock that may give us a breakout or breakdown, i.e. fast and massive upward or downward price action. This is even more essential for option buyers, for two reasons:
- For them to reach their breakeven point, the market may have to move a lot in their desired direction.
- As the time passes, they suffer time decay of their premium. So, it’s essential that they recognize breakouts/breakdowns, so that they can enter the trade at the right time and execute the trade as soon as possible.
When an index or a stock moves sideways for long, we call it its consolidation phase. Herein the price moves within an upper (called resistance) and lower (called support) range. However, if the price breaks the upper limit, we call it a breakout. And if the price breaks the lower limit, we call it a breakdown. Breakouts and breakdowns are good entry points for traders, be it intraday, swing or positional.
To recognize whether a breakout/breakdown is about to come, and also to find resistance/support levels, we can do:
- Technical Analysis, e.g. Candlestick pattern analysis, Chart pattern analysis, etc.
- Quantitative analysis, e.g. have a look at the Options chain, Put-Call Ratio (PCR) data, etc. If PCR > 1.25, and it’s constantly increasing, it’s an indication that an uptrend is about to come. If PCR < 0.75, and it’s constantly decreasing, it’s an indication that a downtrend is about to come.
PCR data is based on change in open interest, which is a metric that you can see in any option chain. It shows the change in open interests that happened on that particular day. That’s why PCR data is more useful for intraday and options traders.
If we are looking for a breakout, we should select the stocks that are close to their resistance levels and observe them for some period. If we are looking for a breakdown, we should select the stocks that are close to their support levels and observe them for some period.
Also ensure that the stock you choose has sufficient liquidity and trade volume. This is not an issue with indexes such as NIFTY, but when it comes to individual stocks we need to do some research.