The Secrets to Day Trading Stocks

Volatility and Liquidity

Stocks with higher daily volatility and liquidity are better candidates for day trading. Daily volatility measures a stock's daily price range, the difference between a stock's highest price point and the lowest price point during a day. The higher a stock's volatility, or the wider a stock's price range, the more the potential profits for day trading the stock. Liquidity measures the trading volume on a stock, or the number of shares changing hands for any given period. Higher liquidity offers narrower bid-ask spreads, allowing day traders to enter and exit trades at better prices.

News events fuel momentum stock moves and are an important information source for day trading stocks. Both general market news and company-specific news may affect stock prices indiscriminately. In other words, any perceived change in a stock's business fundamentals and the forecast evolvement of the economy and market conditions can together move the stock. While some stocks are sensitive to newly released economic data, others can be quickly responsive to things such as political developments, both domestically and internationally. Serious day traders may want to subscribe to a real-time news service and learn to apply news events to stock analysis.

Identifying how stocks move in general helps in formulating relevant trading tactics. Stock charts reveal that in addition to having the daily high and low price points, a stock often moves in continued, alternate ups and downs. In the process, the stock forms a number of momentum uptrends and downtrends during different time periods and the same number of reversal points at different time points. To capture the daily high and low price points, day trading may use a tactic called daily pivot to simply buy at the low point and sell at the high point. Other trading methods include momentum trading and contrary trading, or fading, which use trends and reversals, respectively. While momentum trading may buy before an uptrend, fading may buy after a downtrend but before a potential reversal.

Loss control is necessary because it prevents day trading from becoming potentially longer term trading. Loss control essentially means that a day trader must exit a position for a predetermined, controlled loss, if the market has moved against his previously entered position. Without using loss control, a day trader could be locked into a position for potentially an indefinite period of time before the trade finally turns into a profit. Setting up a loss control depends on a day trader's risk tolerance. There is also a tradeoff between the amount of loss allowed and the potential of losing a winning opportunity. The smaller the controlled loss or the more quickly you exit a losing position, the less chance and time for the current position to potentially turn around.