What to Look for in a Day Trading Stock

With thousands of stocks to choose from, how do you decide which ones you are going to focus on for day trading? It can get confusing trying to figure it out. Some traders find new stocks to trade every day, or hunt for stocks that are breaking out of patterns. Others watch for stocks that breakout of support or resistance levels, or are the most volatile.

Some traders look for stocks that are consistently volatile, trading a handful of those stocks for weeks on end. There are also those that simply trade the same one or two stocks consistently.

This last approach is more beneficial to day traders because they are less research-intensive—day traders don't need to constantly find new stocks, or search for volatility and breakouts. If you are one of these traders and opt to trade one or two stocks (or ETFs) continuously, there are a few factors to look for in the stocks that can help you decide which ones to choose. 

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 occurs when your market order or stop-loss price changes between the time the order occurs and the time the transaction happens. This is common when orders are bigger than the typical number of shares on the bid or offer.

While preferences vary, many day traders will trade stocks with a daily volume of at least 1 million trades (often several million). One of the most heavily traded products in the U.S. is an exchange-traded fund (ETF)—the S&P 500 SPDR (SPY)—which has a daily volume of close to 95 million.

A stock screener can help you narrow the number of stocks down to a number that can be managed. If there are still a lot of stocks in the list, work to reduce it by only considering stocks that do 3 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 can average moves of 0.5% per day, some move around 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, your broker, and your personality. Many people find trading a stock that moves 0.5% to 2% per day tolerable while finding the big swings of a stock that move 5% per day tough to handle.

Volatile stocks require very fast reflexes and instant execution of trades.

Many people are not mentally or physically agile enough to react to a large number of volatile stocks and the price changes that they can go through. This can hinder the effective execution of trades in higher volatility stocks. 

To make it more manageable, you could use a stock screener (such as Finviz) to narrow the number of stocks down to a size that works for you. If there are still a lot of stocks on the list after the reduction, try to further reduce the size of the list by only considering stocks that move in small percentages, such as 1% to 2%.

A few day traders may choose to also trade stocks on news that significantly affects a stock. These are referred to as impact stocks and can offer volatility as an advantage for profit.

Trend or Range

The trend and range of investments are other components to consider. There are range traders, trend traders, and those that do both effectively. Range refers to the difference between a stock's low and high prices in a specific trading period, while trend refers to the general direction of a stock's price. The prices could be continuously moving up or down, signifying an uptrend or downtrend.

If you prefer 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 can help you isolate stocks that trend or range so that 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.

Bringing It All Together

No single 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 your criteria into the appropriate fields to narrow the superabundance of stocks down to a handful.

Then take the best of the best. All else being equal, the right choices are the one or two that have more volume and suit your volatility, trending, and ranging preferences.