Day Trading has quickly become a favourite for many retail investors and has proven to be an excellent way to earn income according to your own pace and knowledge.
With many free online brokerages and information on stocks available on the internet, it has become increasingly easy for a new investor to begin trading.
However, be wary, as day trading is more complicated than it seems, and one of its most challenging aspects is finding the right stocks to invest in. Luckily, we have compiled a list of factors to consider when choosing a stock to trade. Read on to learn how to select stocks for day trading.
What Is Day Trading?
Day Trading is a risky but rewarding strategy that used to be the playing ground for hedge funds, financial institutions, and professionals until recently. The advent of the internet and the rise of online brokerage platforms allowed anyone with an understanding of financial markets to trade for short-term profits.
It is essentially a technique by which an investor buys and sells shares multiple times throughout the day to capitalize on the volatility of a stock’s intraday price. There is inherent risk involved and thus requires a lot of discipline, research, patience, and experience.
Before you start trading, you’ll need to determine what kind of stock you will focus on. There are many options, and choosing the right ones for your shortlist can be a task.
How to choose stocks for day trading?
Here are a few factors that need to be taken into consideration before deciding on day trading a stock:
Liquidity
One of the top priorities of a day trader should be the liquidity of a stock. If there is adequate liquidity, you can buy or sell stocks as needed, which gives you the ability to take advantage of any significant price movements. Large trade volumes also indicate that trades have minimal effect on the price.
Volatility
Even though the profitability of a day trader’s trades depends on the stock’s price movements, you should avoid highly volatile stocks as the price can quickly move against you. Therefore, it’s best to invest in a medium volatility stock that moves around 3% or $1.5 per day.
Correlation
Although many prefer the ‘contrarian strategy’ made famous by the likes of Warren Buffet, a simple yet effective trading strategy is to trade stocks that have a strong correlation with a sector or index. The sector’s performance or index becomes an easy indicator of the market trends, making earning profits easy.
Trends
The market trend usually is a broad indicator of how stocks are behaving. You can make a tidy profit by following the trend, whether in a bullish or bearish market.
Choose brokers that provide advanced tools
Advanced charting tools, stock screeners, research, and analytics provided by your brokers can give you a significant competitive advantage over other traders, and decision-making becomes much easier when there is more information available to you.
Multiple brokerages provide these tools as part of the package, and if they don’t offer one, you can use a free stock screener like Finviz options screener to keep an eye out.
Transparency
Choosing a company whose information is readily available makes decision-making that much easier. If important information is hidden, there can be losses if a wrong position is taken. Stable management is also an essential factor to consider.
Presence in derivatives
Companies in derivatives markets usually have a lot more information about them as they are involved in multiple investment segments. This makes it easier to make informed decisions.
News-sensitive
One of the most popular day trading strategies is aiming for stocks easily affected by the news. Whenever positive or negative information about these stocks is reported, there is a corresponding rise or fall in price, thus making it a prime target for many day traders to exploit.
Why should you Day Trade?
Day trading has considerable upsides. It is just like owning a small business. You make your own decisions and set your timings and limits. You can work wherever you want. All you need is a stable internet connection.
You don’t need to share your profits with anyone else and only give minimal commissions to brokerages. You can use your love for the markets combined with your market experience to your benefit and take advantage of shifts happening in the market.
Day trading has become a great way to earn income for many retail traders due to the advent of many zero commission online brokerages such as Webull and Robinhood.
This, combined with free research websites, news crawlers, and stock screeners, has made day trading accessible to anyone savvy enough to use the tool to their advantage.
The Bottom Line
Day trading is inherently a high-risk, high reward way to invest and earn profits. You must employ discipline and determination to be a successful trader.
Many new traders do not do their due diligence in determining successful strategies. Active research and an uncompromising eye for detail will help you get the edge over other traders.
But the most important aspect required for day trading is to be emotionless. Leave emotions at the door when day trading, as you can become too invested in losing trade and make higher losses instead of cutting early. Getting too excited for a trade can have a similar effect as well as you may get tunnel vision and miss out on other opportunities. Visit Daily Prosper to get more insights and professional help.
Hopefully, this article will help you become a better day trader and has successfully taught you how to choose stocks for day trading.
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