There are some basics that must be present in any stock for it to be suitable for day trading. I will begin with the criterion I value the most and work my way down the list. Remember that these are only suggestions and not hard and fast regulations.
High volume is the single most critical factor in determining whether a stock is suitable for day trading. If there isn’t enough volume in a stock, it’s hard to take meaningful holdings without altering the price. As the spread (the difference between the bid and the ask price) is wider for thinly traded stocks, it is more difficult to predict where you will be able to exit your position if your trade goes against you.
Looking at the stock’s 10-day moving average trading volume is the best approach to get a sense of how frequently it trades. The average spread of a stock reflects the fact that it is more liquid when its trading volume is higher than when it is lower. The only time this doesn’t apply is when a company is “in play” due to news (like an earnings release) or some other event. Since being “in play” can significantly alter a stock’s trading characteristics, the amount of today’s trading is a more relevant indicator of the company’s liquidity than its trailing average daily trading volume.
Great stocks for day trading typically have a daily volume of more than 50,000 shares. The lack of liquidity makes initiating and leaving a position very difficult, and my trading results show that companies trading less than 50,000 shares daily are usually not worth trading. In addition, the low volume of these stocks means that you may have to hang on to your investment for a longer period of time than you had originally planned.
In addition to being easily traded, a good stock for day trading should also provide you with some sort of opportunity. All of the “cause” is just day-to-day pricing fluctuations. If you want to earn money off of day trading, you need to choose stocks with wide enough intraday price swings. An extremely liquid stock that stays at a constant price all day will not give you any chances to make money. To put it in perspective, consider a stock that starts at $56.00, rises to $57.50, then drops to $56.50 before suddenly skyrocketing to $59.00. This stock’s gyrations provide the required volatility for day traders to generate profits.
Taking a look at a stock’s average trading range over the past 10 days or so is a quick and easy way to judge whether or not the stock has sufficient intraday movement. Greater average daily ranges are preferable since they indicate more substantial day-to-day fluctuations in price. A stock that typically has a narrow daily price range can erupt with volatility if it gets “in play,” as was the case with the volume characteristic discussed earlier. Both the trading range and volume of these stocks tend to grow when investors assess the potential effects of news such as an earnings release or takeover rumours.
The last quality of a fantastic stock for day trading isn’t required, but it is a nice bonus to have. On the day that important news is disclosed about a firm, that stock generally has superb day trading potential. Earnings reports, upgrades and downgrades by analysts covering the stock, takeover rumours, fraud allegations (seen recently with many Chinese reverse-merger companies), drug trial news for biotech companies, same-store-sales numbers for retail companies, and so on and so forth are all examples of news items that could affect the price of a stock.
News-related stock price changes tend to be more “clean” and are accompanied by more volume and volatility. A stock with a “clean” move is one that is going to the upside or the downside with little noise in the form of retracements or shakeouts. When day trading, it’s much simpler (and less nerve-wracking) to invest in stocks that are moving steadily upwards or downwards rather than in those whose prices are acting erratically.