Here’s How You Choose Stocks for Day Trading
Being limited to experienced money managers, investment banks, and hedge funds, day trading was not something accessible to the common man in the past. It is a high-risk, high-reward trading strategy that has become increasingly more accessible to intuitive and responsive online brokerages thanks to the era of broadband Internet. Now, anyone having a sound understanding of how financial markets trade in stocks to gain short-term profits can capitalize on this strategy.
There are, however, a few tips that will help guide you how to choose stocks for day trading that are well-suited to your portfolio.
Tip #1 – Liquidity Matters
Equities that don’t have large share floats are difficult for day trading. Keep in mind, however, that the more liquid a firm becomes, the lower multiple it trades at, and vice versa. It’s best to have equities on your portfolio that divide this difference.
Ideal stocks for short-term day trading are those having sufficient share floats, and they trade at higher multiples compared to relevant stocks. The good thing is that even if you’re losing money, these equities typically provide an easy exit to help you cut your losses.
Tip #2 - Volatility Also Matters
Market volatility comes in various forms. Day traders find lucrative trading opportunities in firms which have been mispriced due to external events or macroeconomic factors, because that means they can make a profit.
A mostly artificial and prolonged volatility spike during 2011-12 caused by the Eurozone crisis predominated the reasoning minds of even the most sensible and experienced traders.
Then there were unfavorable macroeconomic events such as the EU bailout to peripheral Eurozone economies getting extended, and a closely-watched Italian bond auction failing. These happenings caused rapid downside moves that helped budding day traders to purchase basically good names at sharp discounts.
Similarly, unexpected earnings reports and unpredictable cash flows also bring about volatility to certain firms. Try looking for companies having unstable balance sheet along with a record of earnings misses or beats.
As an alternative, you can also examine certain firms’ Trade Volume Index. It usually spikes before major downside or upside moves due to several reasons.
Tip #3 – Don’t Forget Banking Stocks
As ironic as it may sound, several public firms earning huge profits via short-term trading are great day trading options. Companies such as J.P. Morgan Chase, Bank of America, and Citigroup happen to be highly liquid and usually track wider-market indexes.
As ironic as it may sound, several public firms earning huge profits via short-term trading are great day trading options. Companies such as J.P. Morgan Chase, Bank of America, and Citigroup happen to be highly liquid and usually track wider-market indexes.
Tip #4 – Search for Web 2.0 and Social Media Gems!
While the tech sector is evolving rapidly and has a troubled past, the Web 2.0 and social media stocks have provided a promising opportunity to online day traders! Companies such as LinkedIn, Groupon and Facebook have stocks that move as a reaction to public events and news that influences the wider technology market. Moreover, they had initially struggled to monetize services that made cash flow figures and earnings reports quite unpredictable.
However, they later started trading at higher multiples and became relatively liquid. This helped them provider wider spreads to day traders looking to make good profits.
Day trading cannot have all types of equities in the strategic mix. If you want to know how to choose stocks for day trading, it’s advisable to use a mix of your own research along with these 4 tips. This will help you pick stocks for your portfolio that complement each other, risk-wise.
