»Fast Profits Daily by Equitymaster

On This Day - 10 JULY 2020
How to Find the Best Stocks for Day Trading - 2

Apurva Sheth, Editor,Profit Hunter Pro

Last time we saw how to eliminate stocks which are not fit for day trading.

This way, you can save your time and capital by removing these stocks from your trading universe.

Today, we will see how to use the process of careful selection to identify stocks which are the best candidates for day trading.

Hi, I'm Apurva Sheth and I welcome you to this latest edition of Fast Profits Daily.

Last time we saw how one could use the process of elimination to remove stocks which are not fit for day trading. So you can save your time and capital by removing these stocks from your trading universe.

So we started out with 4,000 stocks which are listed on the Bombay Stock Exchange, and now most of these stocks are in the illiquid or are of a shady nature. So you can remove them and go with the final BSE 500 or CNX 500 universe which are the best of the best stocks, both in terms of fundamentals as well as liquidity and volumes.

Then, if you want to day trade or want to use leverage, there could be a narrow your unique universe down to 140-240 for stocks which are in the F&O space. These are the most liquid stocks that one could trade in.

However, when it comes to day trading, most of them will not be liquid in the futures space. So what one could do is eliminate the these stocks further by using the average lots which are the in the near month futures. So I told you that one could use the criteria of 3,000 lots. Now the logic behind using 3,000 lots is that the total minutes that day trader has in Indian equity markets is 375. When you divide 3,000 by 375 you get 8.

So 8 is the number of contracts that, on an average, a stock should be trading in a minute. Now if you don't find such a stock or if the stock trades much less than this, then that means that the impact coast will be very high and as a day trader, you want to keep your cost to the minimum so that the profits are maximum. So this is how we used the process of elimination to remove stocks which are not good for day trading.


Now, today we will see how one could use the process of selection to identify stocks which are the best candidates for day trading. So first thing one should do is to use open interest. Now, what exactly is open interest? So open interest is the total number of outstanding positions in our stock. So this would include futures as well as options positions. So you could know what is the open interest for each and every stock stopped by downloading of bhav copy file from the exchange's website.

So today we will see how you could do that and how one could use the open interest data for analysis and if you want to know more about open interest, then I have recorded a video on open interest earlier. You would find the link to this video in the transcript section below this video. So do don't miss that.

So now here we are on the NSE's home page. If you scroll lower, you would find this all reports section out here. You can just click on it and then the section will open where you can go on derivatives and click on bhav copy. So once you click on bhav copy, the file will be downloaded on your PC. Now the file looks something like this.


So now you can simply go on data and filter. So what we're using for analysis is the futures data only. So you can tick out the options, the options stock indices and stock data and click okay. Then you can do a sub total. So always remember that whenever we are using the open interest value, we want to used the cumulative open interest across expires. So we will use the open interest data from all the three expires that is near month, next month, and far month.

So now when you click on sub total, you can change this to symbol so that it will do a sub total on every change in symbol. So let's click 'Okay'. Now, in a few seconds, you would get the cumulative open interest data for all the futures contracts that are available on the NSE.

Now we have this data. You can select it all. Copy it in a different sheet. Do a paste special. Now we have copied this data you can just filter out once more and select the blanks. So now what we have over here is the data for all the futures contracts that are listed. What we are most interested in is the open interest data. So I'll show you how you can use this data for analysis. So here I have the open interest data for the most recent day, that is the eighth of July was available with me.

So now here, you can see have sorted the data based on open interest. So out here you can see the stocks which has registered the maximum open interest. So first on the list is Canara Bank, with the jump of 36% in open interest on a day to day basis. On a one day basis. Next in the list is Tata Chemicals.

So Canara Bank recorded 36% jump in open interest and along with that, it also recorded a 5% jump in price. So price as well as open interest, both are moving up and when open interest is the highest amongst the lot, that is a very good sign that traders are getting interested in the stock. As a day trader, you want to be in stocks where others are also interested. So there is momentum in this in this kind of stocks, and you can use this information to trade on the long side. So as you can see here, I've marked this in the green, which is a positive sign.

Next in the list is Tata Chemicals. It registered on 30% jump in open interest but the change in the price was negligible. So we avoided it. Next in the list is SAIL. Now, SAIL is marked in red out here. The exchanges come up with a list of stocks which are in the ban period on a daily basis. So you can download this list from the exchange's website as well and you can notice that for the ninth of July, these five stocks are banned for trading. So you cannot take fresh positions in these stocks. So you must avoid these stocks.

Next in the list is Nalco. You can see that it recorded a jump of 9% in open interest, along with the 7% jump in price. So this is a very positive sign and the stock is a moving up along with rising open interest. So this is the kind of information you want while identifying stocks for day trading wherein open interest is increasing and along with it, the price is also increasing. This means longs are building up. People are buying the stocks and they are building a position in the derivative segment.

So same thing can be applied in the reverse direction as well. I'll just select all the negative numbers out here and see the stocks where we are seeing a jump in open interest and a fall in price. That would mean that the stock is pushed lower by the bears. So your first stock on the list you can see is my Balkrishna Industries, with 8% jump in open interest and a 4% fall in price. The stock moved lower along with a rise in open interests. So these are the kind of stocks that one should use for trading on the short side.

So that's how one could use this simple information of price and open interest to identify stocks on the short side. So in this sheet I have also added lot sizes, which makes it easier for me to filter out the stocks wherein the liquidity is poor. So based on this information, one could identify stocks for day trading.

Now I know this is a slightly lengthy process and it might be cumbersome for ones who don't have much time, especially the working professionals. So what they could do is follow someone who does this on a regular basis, and the person should be one whom you could trust.

So luckily, you have one such person. Vijay does a lot of work in the F&O space and he shares his insights and views on our telegram channel on our daily basis. So you can simply join him, follow him and see what kind of data he shares. So open interest, increase or fall in prices. He also shares data on volatility and statistical beta, which is also useful while day trading.

So you can join him on our telegram channel and along with him, I also post interesting stuff on the markets and I call my list, the T20 list wherein I look at the broader markets that is the CNX 500 stocks but I exclude the F&O stocks, which are already covered by Vijay. So if you look at both our posts which we do on a daily basis this would cover 95% of the trading which happens on the Indian stock markets. So with these posts, you could keep yourself updated and stay abreast with the market information and flow. Join our telegram channel without fail and keep tracking our posts.

So that's all from me for today. Thanks a lot and have a nice day.

Stay safe and have a great weekend!

Warm regards,

Apurva Sheth
Senior Research Analyst, Fast Profits Report
Equitymaster Agora Research Private Limited (Research Analyst)

PS: Join Vijay Bhambwani at 5 pm this evening at the Instant Income Summit and learn how to make thousands of rupees in extra passive income from the market. Sign up for free here...

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