How To Find The Best Stocks For Day Trading

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How To Find The Best Stocks For Day Trading

Posted By AKash Kumar     July 12, 2022    


My trainer told me repeatedly that you are only as good the stocks that you trade when I was just starting to learn how trades. Anyone who has traded for a while knows that certain stocks are more profitable than others. Finding and trading the best stocks is key to being a consistent profitable day trader.

These are the Characteristics of a Great Day Trading Stock
There are some fundamental characteristics that make a stock great for day trading. These fundamental characteristics are listed in decreasing order. The first is what I consider the most important, and the rest will be less important. These are guidelines only and not rules that can be followed.

1. Volume
A stock that is great for day trading must have enough volume. Stocks with insufficient volume make it difficult to create meaningful positions and not affect the stock's price. It is difficult to manage risk in thinly traded stocks because their spreads (the difference of the ask price and the bid price) are larger. If your trade does not go your way, it can be hard to predict where you will be able exit your position.
It is easy to find a stock's average volume by simply looking at its daily trading volume over the past 10 days. Stocks that trade more frequently are more liquid than those with smaller daily volumes. This difference can be seen in the stock's average spread. This exception is only when a company becomes "in play" due to a news item, such as an earnings report or other catalyst. A company's liquidity can be determined by its current trading volume. This is not the trailing average daily volume that is used to measure it. However, it is possible for a stock to change dramatically in its trading characteristics if it is "in-play".

A great day trading stock will trade more that 50,000 shares per day. My own trading results have shown that stocks trading less than 50,000 shares per day are not worth trading. This is because they lack liquidity which makes it difficult to enter and exit a position. Due to the low volume, these stocks may be more difficult to trade than you expected.

2. Movement
Great day trading stocks must be liquid enough to trade. However, they must also have a reason to trade them. This "reason" can be simply the intraday price movement. You need a large intraday range to make money from stock price movements. This is what makes it great for day trading. It is not possible to trade profitably in a stock that is very liquid. If it trades at the exact same price every day, you will be unable to trade in it. Compare that to a stock that moves from $56.00 up to $57.50 and back down to 56.50, before going up to $59.00. Day traders can profit from the stock's volatility through its gyrations.
It is easiest to see the stock's average Fixed Income Trading range for the past 10 days to determine if it has enough intraday movement. A stock with a larger average trading range is more likely to have sufficient intraday movement to trade. The same exception to the volume characteristic is applicable here: A stock with a low daily price range could explode with volatility if "in play". These stocks have a higher trading volume and a wider range, as traders weigh in on whether an earnings report is important or not.

3. News
A great day trading stock's last characteristic is not a requirement, but rather should be considered a bonus. Stocks that are the focus of significant news items are often great day trading stocks on the day they're released. News items can have a significant impact on a stock's price. These include earnings reports, upgrades or downgrades made by analysts covering the stock. Takeover rumors, fraud allegations (recently seen with many Chinese reverse-merger firms), drug trial news for biotech businesses, same-store sales numbers for retail companies and so forth.

Stocks that are frequently in the news often experience higher volume and volatility, as well as "cleaner” moves. A stock that is trending up or down with minimal noise from retracements and shakeouts is called a "clean" move. It's easier and less stressful to be a day trader. It's better to invest in stocks that move cleanly than stocks that behave erratically.

It's all in one: The Ideal Day Trading Stock
A volatile stock that has lots of volume and fresh news is the ideal stock for day trading. A stock that exhibits clean movements with identified buyers and sellers in level 2 will be a good choice for day traders. This will enable them to profit from the many moves it makes throughout the day. Focusing on stocks with the holy trinity volume, volatility, news, will greatly improve your trading results and help you avoid the "trap" stocks most day traders ignore.

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