6 Tips for Picking the Right Stocks for Day Trading

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If you want to cook a great steak, you need a cast iron frying pan, seasonings, a working stove, and a recipe.

But if you don’t pick out the right piece of meat, odds are you won’t end up satisfied.

Day trading is no different.

You can spend years learning about moving averages, gaps, trendlines, and indicators.

But if you’re day trading the wrong stocks, you’re setting yourself up for failure.

If you ever find yourself asking yourself “what should I trade now,” then this article is for you.

We’ve put together a list of 6 simple, effective tips for picking the right stocks for day trading.

But, before we do, remember, we do not want to have an emotional attachment to any stock. Especially as a day trader, you are trading the pattern and reading what it is saying using an objective method of analysis.

1) Don’t Get Emotionally Attached to Any Stocks

Day trading is about trading patterns using an objective technical analysis method.

You should never form an emotional attachment to any stock, whether positive or negative.

For example, if you make $5,000 on a day trade in Apple (NVDA), don’t fall in love with it.

The next time you pull up the chart, treat it like any other stock. Focus on the pattern, not the ticker.

On the flip side, if you lose $3,500 on a day trade in Netflix (NFLX), don’t consider it cursed. If your analysis indicates there’s a good trade, take it.

2) Watch the News

As a day trader, you want to trade stocks that are moving and showing volatility.

One way to find active names is to look at names in the news.

Stocks can make big intraday moves on earnings reports, upgrades/downgrades, product announcements, FDA announcements, and economic data releases.

So if you’re keeping track of the news, you should be able to quickly find a list of potential day trade.

Whether those ideas materialize into actionable setups is another story.

One example we can look at Citigroup (C), which reported earnings on October 12, 2017.

So there is no problem getting in and out of this name.

As you can see in the chart below, C gapped up, which had traders leaning bullish.

It didn’t follow through, which is why you always need to keep two scenarios in mind — one bullish and one bearish.

So, it is clear that the gap up did not follow-through but, could we have played it from a day trade point-of-view?

Of course!!

If you look at the 5 minute chart, below, you will see how the day played out.

 

 

Following the gap up, C pulled back to fill the gap. But what happened next changed the complexion of the chart.

After the 5-minute bottoming tail formed off the gap fill, it was immediately followed by a large bearish engulfing candle. That told us the bears were in control.

(If you want to learn more on the technical analysis methodology I used to spot day trades like this, you can click here.)

3) Track Stocks Near 52-Week Highs/Lows

Stocks at or near 52-week highs/lows are ideal candidates to see higher interest and therefore, more momentum.

A simple list of stocks near 52-week highs/lows will give you plenty of names to look at.

And again, the market’s trend should play a role in your decision-making.

In bull markets, strong stocks remain strong.

In a bear market, weak stocks remain weak.

And when names run too far in the direction of the trend, you may get opportunities to fade the move and catch a profitable day trade.

Two names that have been great to traders in 2017 are AbbVie (ABBV) and NVIDIA (NVDA), which you can see in these charts:

 

4) Look for Average Daily Volume of 1 million+ with Tight Spreads

Stock selection for day trading is very different from picking stocks for swing trading.

As such, your minimum volume requirements should also be different.

The last thing you want is to check into the roach motel, where you can get in but you can never leave.

At a minimum, look for stocks with a minimum average daily volume of 1 million shares.

Even then, they still need to pass the eye test.

The eye test is to simply look at the chart.

It will tell you if it is clean or to stay away. Just look at the two charts below.

 

The difference in quality should be clear.

Remember, without volume, even the best looking charts will not move.

5) Focus on Names Showing Relative Strength/Weakness

Relative strength and weakness are pretty straightforward on the surface, but they’re actually deep concepts.

A stock that remains strong or bases when its sector or the market falls is showing relative strength. (and vice versa for shorts).

Relative strength suggests continued outperformance while relative weakness suggests continued underperformance.

There are many ways to calculate relative strength/weakness. One easy way is to take a simple ratio of two stocks’ prices.

A rising line indicates outperformance by one vs. the other.

However, seeing relative strength does not mean we just buy blindly. It may simple indicate that a stock is simply declining at a slower rate.

You can also measure the concept of relative strength by comparing the moving averages of a stock to that which you are measuring it against.

But the simplest way to view relative strength/weakness, in my opinion, is to simply look at the chart. That will give you all the information you need.

As a day trader, these relative strength/weakness concepts can help you find the best stocks and avoid the middle-of-the-pack names.

Let’s say the the market gaps up and pulls back to fill the gap. Stocks that also gap up but then go sideways are in a prime position to outperform if the market turns higher again.

Here’s an example.

While the SPY (top chart) was sideways, CF Industries (CF) was showing relative strength after gapping from a base the prior day.

 

6) Keep An Eye Out for Gaps with or Against the Trend

Volatility is a day trader’s best friend, and one of the best ways to get it is through a gap that violates the trend.

Stocks gap up and down every day for any number of reasons.

But the reaction is what really matters.

In fact, I am sure you have seen stocks gap down on good news and gap up on bad news.

That being said, not all gaps are created equal. You need a clear set of rules how you rate and trade gaps.

(if you would like to learn specific tactics for trading gaps, we offer a self-paced home study course on this specific topic called Advanced Gap Strategies.)

Sohu.com (SOHU) is an example that met our criteria for a gap that was likely to follow through:

The daily chart showed a gap above a base and a whole number, with the weekly chart still in an uptrend.

That set the stage for a strong move higher off the open.

On the flip-side, Costco (COST) gapped down after earnings and took out a key area of support:

 

Since COST broke support, it offered day traders follow-through on the short side — two days’ worth.

To the day trader, gaps can be gold if you have a plan and you know how to rule out the fakouts.

In fact, we have trained many traders that make a living trading gaps in the first 90 minutes of the day, and nothing else.

P.S. Want to learn to trade gaps like a pro?

Click here to learn more about our Advanced Gap Strategies course, which gives you a simple, comprehensive method for trading gaps for high profits.

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