How to Identify Stocks to Day Trade
Day trading is an investment practice which has grown with the advent of computers and the explosive growth of online brokers. Day traders buy and sell stock in the same day and make money by investing large amounts to take advantage of small moves in a stock's price. A day trader may only make a couple of hundred dollars on a single trade but if he does that enough times he can make thousands of dollars in a day.
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Instructions
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Open a brokerage account with an onlline discount broker. There are many good online brokers to choose from such as TDAmeritrade or Scottrade. Many give the investor the ability to fund an account electronically from their checking or savings account.
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Select stocks to day trade. The most appealing stocks to day trade are ones with a high amount of liquidity and volatility. Liquidity is the number of shares the stock has and volatility is the price range in which the stock trades. The larger the daily range the stock trades in the better. Day traders also look for stocks with tight spreads and low slippage. Spreads are the difference between the bid price (what someone is willing to buy a stock for) and the ask price (what someone is willing to sell a stock for). Slippage is the difference between the expected price of the trade and the price at which the trade actually executes.
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Determine an entry point for the stock being considered. This is done by using a variety of tools available to investors online. There are candle stick charts which provide a raw analysis of price spikes and dips. The successful day trader will buy in the dips and sell in the spikes. Level II quotes ECN provide a look at orders as they happen. This will give the day trader an idea of where the stock may be headed. And real time news services provide news updates which may affect a stock's price.
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Develop a strategy for day trading. An affective strategy is scalping, which is selling a stock immediately when it has a profit. Another strategy is fading, which involves shorting stocks after they have had a big move upwards. Many times after a stock has had a move upward it will fall back due to people taking profits on their positions. A third strategy is daily pivots, which is simply buying at the stock's daily low and selling at its high. And finally there is momentum, which is the practice of buying stocks on news releases which affect the stock and riding them to a high and selling.
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Determine a stop loss. A day trader must set a limit that he is willing to lose on a stock before he sells. This is very important because if a day trader holds onto a loser too long he can lose large amounts of money. The successful day trader will set a very tight margin of loss and stick to it.
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Tips & Warnings
Day trading is a difficult skill to develop and 80% of day traders lose money.
