How to Pick Stocks for Day Trading

There’s been a massive boom in day trading over the past few years. It seems like overnight, millions of retail investors opened no-fee brokerage accounts with the express purpose of speculating on short-term volatility. There have been tons of success stories and plenty of big-time losses. However, the most prominent aspect of the day trading boom has been a crash-course education for new traders. The top question? How to pick stocks for day trading.

Most newcomers to day trading find themselves trying to time entry/exit from stocks they know very little about. However, with a very small amount of research, it becomes much easier to spot stocks with day trading opportunities.

Here’s a look at six rules for how to pick stocks for day trading and why they’re important to keep in mind for new and experienced traders alike.

An investor learns how to pick stocks for day trading

Rule 1: Pay Attention to Volume (Liquidity)

Volume is one of the most important prerequisites for day trading. A stock with high volume means there’s liquidity, which is necessary for traders looking to get in and out of trades quickly. The lower the volume, the more difficult it’s going to be to execute on trades in a timely fashion. You run the risk of getting trapped in a position or worse, executing a partial trade because there’s no demand at the volume you’re looking to trade. Higher volumes allow you to leverage a greater position for more returns, without stretching the amount of time you spend in a position.

Rule 2: Target Mid-to-High Volatility

Volatility is a day trader’s friend. While every stock is subject to some degree of volatility throughout a trading period, traders really want to hone-in on those that show strong fluctuations. Remember, movement equals money. Look for stocks that can fluctuate at 3% or more throughout a trading period. This level of movement not only offers the potential to reap big gains on a well-timed trade, it can also add a buffer if you miss an optimal exit point.

Rule 3: Identify and Trade Trends

If you’re going to become a day trader, you need to get familiar with chart analysis and pattern recognition. Once you’re adept at spotting patterns and recognizing different signals, pull up charts for stocks trading at high volumes and start to assess them. Pattern trading software is almost essential for day traders, since patterns can form and culminate very quickly in volatile stocks. Be sure to look at recent patterns and activity as you assess in real-time, and look for stocks that seem to retrace patterns.

Rule 4: Trade in the Direction of Momentum

Never go against the grain. Look for stocks that are generally trending up or down, in spite of their volatility. Stocks that trade sideways have the potential to break one direction or the other, which could trap traders in a difficult position if they aren’t quick enough to exit. It’s often smart to identify up- or down-trending stocks and gauge them against a relative strength indicator, to better-understand the bullish or bearish sentiment. Then, trade volatility with momentum in mind.

Rule 5: Keep Tabs on News and Chatter

Stocks that get attention are more likely to have volume and volatility. Look at newsworthy mentions, chatter on social media or even community threads on investing sites to see what people have to say about a stock. if the chatter turns poor, you can bet the stock is likely to trend down. Likewise, positive sentiment can send it spiking. It doesn’t matter which direction it goes, day traders need to have a plan for entering a position as this chatter begins to form and exit before it plateaus. Conversely, stocks that are radio silent or get no media attention are prone to low volume and less volatility.

Rule 6: Trade Industries You Understand

As mentioned earlier, it’s easy for new day traders to hop on meme stocks and popular mentions. But in this sense, you’re not really learning how to pick stocks for day trading; you’re just following the crowd. Without understanding the stocks you’re trading, you risk entering and exiting positions after more knowledgeable traders, which means taking on more risk. Instead, start with stocks in industries you understand. Fundamental knowledge goes a long way in being able to understand stock movements and the factors causing them.

BONUS: Follow the Lead of Insiders

Unless you spend a lot of time learning the markets and becoming a trading expert, you’re not likely to outperform those who do. Thankfully, you don’t need to become an expert: you just need to listen to experts. Subscribe to an investment newsletter, listen to a podcast, read a column or fill your Twitter feed with experts you trust. You don’t need to take their advice word-for-word; instead, use it as a jumping off point for your own decision-making. It helps to have clear facts and insights.