What to Look For In a Day Trading Stock

Qualities of a good day trading stock

With thousands of stocks to choose from, which ones are you going to focus on for day trading? Some traders find new stocks to trade every day, always looking for stocks that are breaking out of patterns, through support or resistance, or are the most volatile. Other traders look for stocks that are consistently volatile, and trade a handful of those stocks for weeks on end. Other traders trade the same one two stocks all the time. This last approach is less research intensive, because the day trader doesn't need to constantly find new stocks. If you opt to trade one or two stocks (or ETFs) all the time, here's what to look for. 

Volume

Stock market graph on iPad
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An active day trader requires adequate stock volume to enter and exit trades on demand. The higher the volume the easier it is to enter and exit positions (relative to lower volume stocks) with little or no slippage. Slippage is when your market order or stop loss fills at a different price than expected; this is common when an order is bigger than the amount of shares typically on the bid or offer

While preferences vary, most day traders trade stocks with at least 1,000,000 in daily volume (usually at least several million). One of the most heavily products in the U.S. is actually an ETF--the S&P 500 SPDR (SPY)--which has daily volume of 100,000,000 or more. 

Use a stock screener to narrow the number of stocks down to a manage size. If there are still a lot of stock in the list, get it down to a handful by only considering stocks that do three million (or more) in daily average volume. 

Volatility

A common day trading approach is to trade stocks which have strong movement throughout the day. Each stock has a different volatility "personality": some stocks on average move 0.5% per day, some move about 1% per day, and other stocks move more than 5% a day.

What stocks you choose to trade depends on your trading style, your reflexes, broker and personality. Most people find trading a stock that moves 0.5% to 2% per day tolerable, but many traders may find the big swings of a stock that moves 5% per day tough to handle. Also, volatile stocks require very fast reflexes and instant execution of trades. Therefore, physical limitations (personal and broker) can actually hinder the effective execution of trades in higher volatility stocks. 

Use a stock screener to narrow the number of stocks down to a manage size. If there are still a lot of stocks on the list, get it down to a handful by only considering stocks that move a certain percentage, 1% to 2% for example. Experienced traders may choose to focus on stocks which are more volatile. 

Trend or Range

The trend or range is another component to consider. There are range traders, trend traders, and those that do both effectively.

Use  a stock screener (like Finviz) to find stocks which suit the trading method you use. This seems like a very simple statement, but if you like trading ranges, only trade stocks which have a tendency to range. If you utilize a trending strategy, only trade stocks that have a trending tendency.

A stock screener helps isolate stocks in trends or ranges, so you always have a list of stocks to apply your day trading strategies to. Finding stocks that conform to your trading method will take some work, as the dynamics within stocks change over time. It's time well spent though, as a strategy applied in the right context is much more effective than a strategy applied in the wrong context.

Bringing It All Together

No one element is complete on its own; you want volume, volatility and a trending or ranging tendency (depending on your strategies) in the stock you trade. When using a stock screener input criteria into these and related fields to narrow the universe of stocks down to a handful. Then take the best of the best. All else being equal choose the one (or two) that has more volume, or that suits your volatility or trending/ranging preference.