HOW TO CHOOSE STOCKS FOR DAY TRADING ?
Day trading is a
specific trading technique where a trader buys and/or sells a financial
instrument multiple times over the course of a day, to exploit minute
volatility in the asset's pricing. While private investors may practice this
investment strategy, it is more commonly an institutional phenomenon, as a
financial institution can highly leverage its transactions to boost its
profitability. As many brokerages allow for trading online, day trading can be
conducted from virtually anywhere, with only a few necessary tools and
resources. However, day trading is inherently a highly risky investment
strategy.
High Liquidity
and Volatility
Liquidity, in
financial markets, refers to the relative ease with which a security is
obtained, as well as the degree by which the price of the security is affected
by its trading. Stocks that are more liquid are more easily day traded;
moreover, liquid stocks tend to be more highly discounted than other stocks and
are, therefore, cheaper. In addition, equity offered by corporations with
higher market capitalizations are often more liquid than corporations with
lower market caps, as it is easier to find buyers and sellers for the stock in
question.
Stocks that
exhibit more volatility lend themselves to day trading strategies, as well. For
example, a stock may be volatile if its issuing corporation experiences more
variance in its cash flows. While markets will anticipate these changes for the
most part, when extenuating circumstances transpire, day traders can capitalize
on asset mispricing, such as the currently ongoing euro crisis. Uncertainly in
the marketplace creates an ideal day trading situation.
Trading Volume
and Trade Volume Index (TVI)
The volume of
the stock traded is a measure of how many times it is bought and sold in a
given time period. This time period is most commonly within a day of trading.
More volume indicates interest in a stock, whether that interest is of a
positive or negative nature. Oftentimes, an increase in the volume traded of a
stock is indicative of price movement that is about to transpire. Day traders
frequently use the Trade Volume Index (TVI) to determine whether or not to buy
into a stock, which measures the amount of money flowing in and out of an
asset.
Social Media
The Social Media
industry has also been an attractive target for day trading, recently. The
massive influx of online media companies, such as LinkedIn and Facebook, has
been followed by a high trading volume for their stocks. Moreover, debate rages
over the capability of these companies to transform their extensive user bases
to a sustainable revenue stream. While stock prices theoretically represent the
discounted cash flows of their issuing corporations, recent valuations also take
into account the earnings potential of the companies. Thus, some analysts argue
that this has resulted in higher stock valuations than the fundamentals
suggest. Either way, social media continues to be a popular day trading stock
group.
The Bottom Line
Day trading,
while a highly risky investment strategy, is also very common and highly
lucrative. Variables such as the relative liquidity, volatility, trading volume
and variable industrial conditions, are all contributing factors in determining
what stocks are best for day trading.
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