Learn How To Pick The Best Stocks For Day Trading
One question I get asked often when I’m presenting seminars is how to pick the best stocks for day trading and swing trading; this is a great question and one that can make a huge difference in your bottom line. Picking the wrong stocks can be a major contributing factor to why some trades don’t work out and others do. Often times the same set up can have entirely different results when trading two separate but related stocks, even stocks that have a high degree of correlation can have a different result on your bottom line if you don’t choose the better performer out of the two?
Create Filtering System For Picking The Best Stocks For Day Trading
Each stock that I choose for my daily hit list as I like to call it goes through a filtering process that I’ve been using for several years now. It’s a simple process that you can use and adjust to your criteria. Once you begin using this type of method it will become second nature and you will find that whenever you look at stocks you will automatically begin analyzing and thinking if it fits your criteria subconsciously.
The first and the most obvious factor I look at is the price of the stock. If I’m going long I usually stick with stocks that are priced over $20.00. If I’m selling stocks I may look for lower priced stocks but I never go below $15.00. There has to be a good reason for me to look at a stock that’s priced in the low range, otherwise I stick to stocks that are priced between $30.00 and $150.00 per share. I find that higher priced stocks have more intra day price volatility than lower priced stocks. You want to find stocks with strong volatility so always try to go for the higher priced stock if you have to choose between two different stocks.
This is something beginners don’t pay too much attention to because they don’t yet realize how much wide spreads can damage your bottom line. The daily trading volume largely influences the spread between the bid and the offer so make sure you trade stocks that have an average daily volume over 250,000. Stocks that have low daily volume may exhibit strong volatility but the spreads will be so wide that your profit potential between the time you enter the trade and exit the trade will be wiped out due to the gap between the bid and the offer. Before you make your final decision to enter a position always check the bid and offer live and see how far apart the spread really is. This will give you a good idea what your loss will be on the spread alone.
Another important factor that you should examine prior to entry is the daily trading range. Some stocks have relatively small trading range that makes them bad candidates for day trading. However, every stock at one point or another regardless of their typical characteristics goes through a range expansion period. This usually occurs when there are some fundamental news related to the particular business industry or the company itself and has a significant effect on the daily trading range of the stock. These range expansion periods are ideal periods for day trading so make sure you know how to determine if significant range expansion is taking place. I prefer to use the Average True Range indicator to determine range expansion. I wrote several articles on using the ATR to determine the daily range and you can find them at Marketgeeks.com. In a nutshell the ATR measures the daily trading range and averages the total over a specified period of time. You should make sure the ATR is significantly increasing and producing a minimum daily range of $2.00; Otherwise the stock won’t give you enough profit potential to make your risk to reward level high enough to trade it in the first place.
One of the biggest driving factors for individual stocks is their sector. Statistically sectors are responsible for roughly 70% of all movement of individual stocks. So knowing what other stocks in your chosen stocks sector are doing can be very important in determining if you want to add the stock to your daily hit list or not. Take gold for example you can see by comparing these two separate stocks how they move in the same direction the majority of the time. If you look at most sectors such as oil, semiconductors, as well as dozens of others you will see very strong correlation between individual stocks.
Notice how the two separate companies are moving almost identically to each other. You will double your position by trading these two stocks at the same time.
Not paying attention to correlation is one of the most common mistakes beginners make when they create their hit lists. I don’t know why this happens but many traders don’t think correlation is a big deal. Remember if you are trading two stocks that are trading similarly you are doubling your risk instead of diversifying it. You goal in picking the best stocks for day trading is to find stocks that are not correlated to each other.
This will give you the best diversification and opportunity from your daily hit list. I recently participated in a seminar and noticed one trader who was holding four semiconductor stocks at the same time.
This is a big red flag that you can avoid by doing proper correlation analysis. Trade stocks in completely different industries as far apart from each other as possible. This way you will get the best diversification and opportunity to profit from different sectors.
When selecting the best stocks for day trading or swing trading make sure you follow these basic guidelines. Always pick higher priced volatile stocks that are are going through a range expansion. Make sure you look at real time spreads between the bid and offer to make sure the spreads are tight. Always look at correlation and sector analysis before selecting your stocks for your daily hit list.
Our Floor Traders Edge program does a great job of selecting stocks with the best relative strength and other criteria for day trading.
Have a great trading day!
By Roger Scott