Volatility and day trading

Volatility Is The Key To Day Trading

Successful day trading requires the ability to spot trends and patterns quickly, and act on them. It’s tough to know which stocks to watch, but once you have learned the skill, you will be ahead of the game.

You should maintain a “watch list”. These are a cross section of stocks that you keep an eye on. Many stocks have recognizable patterns, and with a little experience at watching the same group of stocks, many traders can make educated guesses about whether the stock is about to move up or down. Most day traders, at least the successful ones, make trades from their watch list.

There are several criteria for choosing stocks for your watch list!

Probably the most important is liquidity. I always look for stocks that trade at least 250K shares daily. If the stock isn’t trading well, you may have trouble selling when you need to get out. If you can’t sell the stock, you’re obviously not going to make any money. I would rather trade stocks that are moving over 1M shares a day, but certainly never less that 250K. If the stock is too thinly traded, the market makers can manipulate the price too easily.

You will also want to look at volatility. Volatility is the rate at which the price of a security moves up or down. A $20 dollar stock that moves up or down by $5 in a day would be considered highly volatile. Large price swings are where knowledgeable day traders make money, and others lose money. In my opinion this is one of the most important criteria. Good stocks, at least from a day trading perspective, are volatile. Day traders make money when the price moves dramatically over a day, or a few days.

Avoid high dividend stocks. We are not in this for the long term, so the dividend is irrelevant, and these stocks tend to have high prices and low volatility. There is certainly nothing wrong with dividend paying stocks, but they should be part of a long term investment strategy, not a trading medium.

Big board stocks can have high volatility and large price swings. But measured by percentage, nothing has the volatility (and risk) of pinksheet stocks or "penny stocks". These low priced stocks trade for under a dollar, and at times can have huge volume. Some stocks make moves of as much as 100%-200% or more IN A DAY. There is obviously a tremendous amount of risk here. But you can start out with only a few hundred dollars. As long as you pick well, you can actually make money. I know people who make their entire living from trading (mostly) penny stock.

Put together a list of 30 – 50 stocks, get to know everything about them. What market factors affect their movement. What news items cause them to move up or down. This is your stock farm, cultivate it. Once you know what moves your stocks, you will be able to trade like a pro.