One of the most frequently asked questions I get while hosting seminars is how to pick the best stocks for day trading.
It’s a great question and one that can make a huge difference to your bottom line.
Picking the wrong stocks is sometimes why some trades don’t work out but others do. Oftentimes, the same setup can have entirely different results when trading two separate but related stocks.
I mean, even stocks with a high degree of correlation can have a different result on your bottom line if you don’t choose the better performer of the two.
How to Pick the Best Stocks for Day Trading: Create a Filtering System
Each stock I choose for my daily watchlist, or “hit list” as I like to call it, goes through a filter.
It’s a simple process you can use and adjust to your own stock picking criteria.
Once you learn how to pick the best stocks for day trading, this method will become second nature to you. You’ll find that whenever you look at stocks, you’ll begin analyzing and thinking about how they fit or don’t fit into your criteria.
I’ve been turning to this strategy for several years now myself!
How to Pick the Best Stocks for Day Trading: Check the Stock Price
The most obvious factor I look at when picking stocks to trade is price.
If I’m looking to go long, I tend to stick with stocks priced over $20. If I’m selling stocks short, I might look for lower-priced companies, but never anything trading below $15.
And there needs to be good reason for me to look at a stock that’s priced in the low range.
Otherwise, I stick to stocks that are priced between $30 and $150 per share.
I find that more expensive stocks have more intraday price volatility than cheaper stocks. When learning how to pick the best stocks for day trading, you want to find the ones with strong volatility.
In other words, go for the higher-priced stock if you have to choose between two.
How to Pick the Best Stocks for Day Trading: Volume and Spread Analysis
This is something most beginner traders don’t pay much attention to when learning how to pick the best stocks for day trading because they don’t realize how wide spreads can damage your bottom line.
The daily trading volume has a huge influence on the spread between the bid and the offer. So make sure you’re trading stocks that have an average daily volume over 250,000.
Stocks with a low daily volume may exhibit strong volatility, but the spreads will be so wide that your profit potential between the time you enter and then exit the trade will get wiped out due to the gap between the bid and the offer.
Before you make your final decision to enter a position, always check the bid and offer to see how far apart the spread really is.
This will give you a good idea what your loss will be on the spread alone.
You can also check out this article for more information on the bid-ask spread.
How to Pick the Best Stocks for Day Trading: Look for Daily Range Expansion
Another important factor you should think about prior to entry is the daily trading range.
Some stocks have relatively small trading ranges, making them bad candidates for day trading.
But every stock at one point or another — and regardless of their typical characteristics — goes through a range expansion period.
This tends to occur when there’s some fundamental news related to the particular industry or company itself. It typically has a significant impact on the daily trading range of the stock.
These range-expansion periods are ideal for learning how to pick the best stocks day trading, so make sure you know how to determine if it’s present.
I prefer to use the average true range indicator to determine range expansion.
In a nutshell, the ATR measures the daily trading range and averages the total over a specified period of time.
Make sure the ATR is rising significantly and has a minimum daily range of $2. Otherwise, the stock won’t give you enough potential to make your risk-to-reward level high enough to trade it in the first place.
Why Sector Analysis Is Important
One of the biggest driving factors for individual stocks is their sector.
Believe it or not, sectors are responsible for roughly 70% of all movement of individual stocks.
So knowing what other companies are related to or in the same sector as the stock you’re looking at is important when figuring out how to pick the best stocks day trading. It’s a crucial thing to know when adding stocks to your daily hit list.
Take gold for example…
By comparing the two stocks below, you can see how they move in the same direction a majority of the time. If you look at most sectors such as oil, semiconductors or dozens of others, you’ll see strong correlation between individual stocks.
Notice how the two separate companies are moving almost identically to each other. You could double your position by trading these two stocks at the same time.
Don’t Put All of Your Eggs in One Basket
Not paying attention to correlation is one of the most common mistakes beginners make when they create their hit lists.
Many traders don’t think correlation is a big deal.
But if you’re trading two stocks that are trading pretty much the same, you’re doubling your risk instead of diversifying it.
The goal when learning how to pick the best stocks for day trading is to find companies that aren’t correlated to each other.
This gives you the best diversification and opportunity.
I recently participated in a seminar and noticed one trader who was holding four semiconductor stocks at the same time.
This is a big red flag you can avoid by doing proper correlation analysis. Trade stocks in completely different industries as far apart from each other as possible. This way, you’ll get the best diversification and opportunity to gain from different sectors.
Things to Keep in Mind
When learning how to pick the best stocks for day trading, make sure you follow these basic guidelines.
Always pick higher-priced, volatile stocks going through a range expansion.
Look at real-time spreads between the bid and offer to make sure the spreads are tight.
And always look at correlation and sector analysis before selecting which stocks to trade.
If you’d like to learn more about how to pick the best stocks for day trading, check out these other posts: How I Pick the Best Stocks to Trade and Critical Stock Market Analysis Tools You Need to Know.
And if you haven’t done so already, subscribe to our YouTube channel so you can be notified as soon as we make our next post, and see what trade opportunities we’re paying close attention to!
All the best,
Senior Strategist, WealthPress