To succeed as day trader, it is important to select good stocks by following certain criteria. The rules which successful day traders follow are as under :-
1. Trade liquid stocks
2. Avoid unpredictable (chaotic) stocks
3. Trade stocks with good correlation
4. Move with the trend
Trade liquid stocks : Liquidity of the stock is oxygen for the day traders. Thus liquidity is the first and most important rule while selecting a stock for day trading. A liquid stock is one, which has a high average trading volumes, so that it can be bought or sold in sufficient quantities without causing much impact on the prices. Some of the examples most liquid stocks include Reliance Industries, SBI, Infosys, ONGC etc.
Avoid unpredictable (chaotic) stocks: Generally it is seen that stocks that are trading with low average daily volumes or stocks where some big news is soon expected, tend to trade in a highly unpredictable manner. Sometimes even after an important announcement — which may be either good or bad (like big order, good results, bad results, plant shutdown etc) — the stock may trade in a chaotic manner. So it is advisable to avoid such chaotic stocks. Some of the mid caps, and most of the small caps especially those in S, T and Z group are chaotic stocks; better not to trade them from intraday point of view. They also have very low volume thereby increasing their unpredictability.
Trade stocks with good correlation : It is advisable to trade in stocks that have more in correlation with major indices and sectors. That is if the index or a sector moves up the stocks belonging to that index or sector also moves up and vice versa. Stocks that track and trade in correlation with the group (sector) to which they belong are more readable & reliable, so that if any good/bad news comes in, affecting the sector as a whole, then you can depend on the stock to move in the manner as the overall sector is expected to move. For instance, if the Indian rupee strengthens against the US dollar then all IT companies depending on US markets get adversely affected. A stronger rupee means these IT companies will earn less from their exports. Conversely rupee weakening against the dollar leads to increase in their export earnings.
Move with the trend : It is always easier to swim along the river rather than across it. Always remember this thing while day trading. If we are in a secular bull run, then it is advisable to find stocks (sectors) that are going to rise, rather than finding stocks (sectors) that are going to fall. Similarly if we are in a bearish phase, then it is advisable to find stocks (sectors) that are going to fall, rather than finding stocks (sectors) that are likely to move up.
Research : Quality research is the key to success. However, it is generally observed that day traders hardly do any research. First, identify an index (like the BSE Sensex or the NSE Nifty) that fits your style of trading and then identify sectors within this index that appeal to your interest. Next step is to create a significant list of stocks within each such sector. Note that stocks in the sector need to be leader of that sector, and should be most tradable. Daily analyse these stocks technically to decide whether they will move up or down the next day. You also need to find out a particular stock’s key levels of support and resistance. Is the stock overbought or oversold? Has volume been showing any significant changes? Also study the fundamentals of the companies and try to know when they declare their quarterly results. Studying how a particular stock moves on the day before the result, when the result is announced and after the result helps a day trader understand how the market reacts to results.
Source : Guide To Intra Day Trading ( Book )