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Intraday trading is a set of tactics widely applied to speculate on short-lived market fluctuations with hopes for greater profits. Thanks to online platforms, day traders now may get in and out of stock transactions multiple times within a business day. However, not many retail traders obtain even a fighting chance from this strategy, which partially originates from the wrong choice of stocks. In this article, you will discover cardinal rules to scan a myriad of equities and pick the best securities therein.
Rules for Picking Stocks When Intraday Trading
Monetary success might come to day traders like a flash, but they are likely to face massive failures compared to other traditional stock investors or longer-term traders unless they fail to tackle market movements. If you are new to the market, you should comply with the fundamental principles before day trading any securities.
Evaluate Your Current Position
Various traders work out a strategic plan on other successful peers’ coattails. No expert advises against this measure, but you should keep in mind that the tailored strategy should tally up your ultimate goals, experience level and other notable factors such as capital and risk tolerance. Profitable strategies sometimes do not work well in all situations, so they need to be periodically reviewed and modified to best match your characteristics, personal situations and values.
What’s more, even the most preferred blue chips may expose traders to precarious positions. Therefore, there is no need to get an emotional bias in any certain stock or ETF. All you should do is comb through the company’s financials, earnings sessions, sector-related reports, and the economic calendar for a better understanding of the selected stocks. This helps detect their familiar patterns in the trendline and supports an informed decision.
Focus on Market Liquidity and Volatility
Liquidity and volatility are two critical considerations in any financial market. The former terminology refers to how easily stocks are purchased and sold without significant changes in their price. Large-cap or sought-after corporations often release highly liquid stocks compared to smaller companies.
Meanwhile, volatility measures the change speed of the stock price. Assuming the issuing company’s cash flow goes through more variations or its new product plans to be launched, its stock may accordingly be more volatile. Though day traders frequently try to foresee those violent shifts and avoid those with high volatility, many of them can take advantage of the market uncertainty to win big money virtually. To check out those metrics, you may access the discount broker’s website and other financial sources such as Google Finance or Bloomberg for more information.
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Have an Adequate Selection
Although diversifying the investment portfolio across multiple sectors is among the key causes to spread out potential risks, it does not translate to trading in too many stocks. Tracking and studying single security wear you out, so little wonder that you have difficulty taking control over massive holdings. That is why it is better to make a focused investment in several industries that mirror your current situations.
Track Trade Volume Index (TVI)
Day traders also base their buying decisions on the Trade Volume Index (TVI) which uses intraday data to gauge the cash inflows and outflows of an instrument. This technical indicator moves dependently with the security’s direction and helps examine whether that asset is bought (accumulated) or sold (distributed).
Follow the Market Trends
Market trends referred to herein are the bull or bear runs the market is dominantly working on. One simple rule to apply entry and exit strategies to the stock market is going long when the market moves up and going short when the market is weighed down. Normally, the chosen stocks may experience various trends within one trading day. So day traders can start opening some respective positions on a certain cycle that is predicted to last over the long run before a reversal takes place. When the market changes its dominant direction, traders will commence with a new trend.
According to professional traders and financial experts, you can make a purchase after the stock drops toward the upward trendline and then promptly recovers. To determine whether the trend is on a bull run, you need to identify a price low and subsequently a higher price low in a technical chart. Conversely, short selling is suggested when you spot the stock hopping over on a downward trendline.
Moreover, they also use other technical tools such as resistance and support to draw the current and consecutive intraday trends which help conclude suitable entry and exit points. Inevitably, losing trades are unavoidable but successful day traders always try to end their trading day with much higher profits than losses.
Go Beyond the Border
The coming of online platforms and wireless connections allows traders to reach a universe of stocks beyond their geographical boundaries. You might either go to online brokers for a wide selection of single stocks or a hedge fund for exposure to more stocks. Going global helps increase the possibility of securing the best instruments or cheaper alternatives.
How do Day Traders Pick Stocks?
Day traders can have different approaches to add the best stocks to their watchlists. Here are several popular ways to narrow down your selection:
Consider Liquid Stocks
Liquid equities are regularly traded in considerable quantities. So, it is not a daunting task to find the counterparty who is willing to accept the desired price of your position, however long or short. Moreover, intraday trading strategies require both velocity and precise timing of placing an order, hence the deluge in shares of a certain stock will facilitate your opening and closing of the position without profoundly affecting the determined price.
Market depth, which is already integrated into several trading platforms (i.e. MetaTrader 5), is another essential tool to show you a real-time list of the stock’s trading volumes at different price levels below or above the defined bid or ask.
Avoid Penny Stocks
Defined by the Securities Exchange Commission (SEC), penny stocks come from small companies and are traded at under $5 per share via the over-the-counter (OTC) system in lieu of formal exchanges. These securities, in nature, undergo faster swings than their large-cap counterparts. This is because their low cost encourages traders to purchase remarkable numbers of shares, making them more volatile. Not to mention that those low-priced instruments are deliberately manipulated by those promoting stocks or committing pump and dump (P&D), with the aim of misleading investors to think that they can make a fortune from those deals.
Compared to other conventional stocks, penny equities are associated with much lower liquidity, thus you will find it overwhelming to snap them up or cash out of trades. That is why penny stocks should be excluded from your investment portfolio. Additionally, if your capital does not suffice to purchase full shares, you may factor in fractional ones that are created from stock splits.
Select Stocks with Medium Volatility
Traders are not dependent on the intrinsic values of security such as dividends to make money, but rather capitalize on short-lived market fluctuations. Therefore, unless the stock experiences volatility, speculative traders can hardly generate profits from equity transactions.
Normally, veterans revel in securities accompanying high volatility because such stocks may bring them respective enormous gains if their prediction about the market trend proves accurate. This choice is discouraged among the inexperienced because they are often incapable of riding the rough patches with minimal losses. Meanwhile, lowly volatile securities seem unattractive to day traders. So, new stockpickers are highly recommended to choose securities whose amount of movement is reasonable and manageable. Besides, you should adopt stop-loss features to keep potential losses within an acceptable range.
Opt Decent Correlation Stocks
Like most day traders, you can keep an eye on securities favorably correlated with their index groups, particularly the S&P 500 and NASDAQ indexes. You then may categorize stocks that move slowly or rapidly compared to those indexes. Accordingly, provided the market is on an upward trend, you should go long on strong equity that moves higher than those indexes because they can motivate the market to work better and consequently bring profit potentials. Otherwise, the shrinking market may signal the short sale of weak stocks that fall more than the indexes. When the market is dropping, traders will reap potential incomes from those assets.
Nonetheless, if you just focus on the same stock or stock basket every day, it is unnecessary to care about the single stock’s correlation with its index or sector.
Choose What You Better Understander After Thorough Research
Irrespective of whether you trade an individual stock, a stock ETF or a stock futures contract, you had better stick to what you spend hours researching, tracking, and browsing through the issuing company’s financial statements. It is more advisable than plumping for stocks you have no knowledge about, even when they are universally preferred by many traders.
Besides, you should not focus attention on securities that are manipulated or based on rumors. GameStop’s stock, GME, is notorious for its sharp fluctuations from early 2021 onwards due to Elon Musk’s tweets and Reddit-addicted investors’ attempts to maneuver the stock. And rookie traders find it daunting to deal with its rapid change, so such instruments as GameStop’s equity should be taken away from your investment catalog.
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