6 Secrets to Finding the Best Day Trading Stocks

John Parker - August 30, 2019

Day Trading Stocks: Top 5 Tips

Day trading can be intimidating for many investors, but finding quality day trading stocks isn’t quite as stressful. If you know what to look for, you can find great day trading opportunities every day. Day traders only hold stocks for a few hours, so the attributes of quality day trading stocks vary significantly from those of traditional long-term investments.

Most notably, day traders don’t care which way a stock is headed in the long run. Many day traders exit their positions by 11:30 AM, and none of them hold stocks through the close. Day traders exposure to stocks is so brief that certain areas of equity analysis become largely irrelevant. For example, who cares how much debt a company has on their books if you’re only holding shares for 3 hours? If it won’t affect the stock in the day’s trading session than day traders don’t care. Resultantly, day traders rely less on fundamentals and more on momentum.

1. Follow The News

Day traders can find better trade opportunities in a newspaper than a balance sheet. News events fuel most daily movements in stocks, so following the news and predicting the market’s response is imperative to successful day trading.

It doesn’t matter what happened, predicting how the market will react is the objective. Stocks don’t always move along lines of reason. Stocks regularly go down after beating on quarterly earnings estimates or go up after missing. Why? Because prices are subjective interpretations by emotional humans. However, in the long run, free markets almost always balance themselves out over time.

Following the news is mandatory for any active investor. Advanced traders need to follow a business newswire site to stay informed. Stock Dork Alerts are totally free email updates that will help you track the market with regular alerts, and it’s totally free to join. Click here to sign up. Don’t worry, there are plenty of free sites available if you’d rather not do email. Check out these free newswires from MarketWatch and Yahoo! Finance

2. Always Read the Spreads

Day traders are the guerilla raiders of the investment world, they get in and then get out. In many cases, day-traders use leverage to get the most out of what may only be a small change in share prices. When you’re making high-volume leveraged trades, one or two pennies could cost you thousands of dollars. For that reason, day traders favor stocks with excellent liquidity.

Spread is the difference between the bid and ask prices in stocks. High spreads mean a greater risk of losing money due to low liquidity. To avoid high spreads, look for high-volume stocks with spreads of less than 1 cent to ensure that you can exit your position when you need to.

3. Listen to the Buzz: Day Trading with Premarket Volume

Abnormal trading activity in premarket hours indicates that a stock could be making a move. The resultant buzz creates a buying frenzy that runs up share prices.  Many day traders screen for premarket volume above 50K when they’re looking for good day trading stocks. However, filtering to 100K returns even stronger day trading opportunities.

daytrade stocks4. Pre-Market Day Trading: Gaps

Day traders use gaps to find good day trading stocks. If a stock opens at a different price than its previous close, it’s called a gap. Stocks can gap up or gap down, and either type provides information that day traders can exploit. In most instance, stocks gap because some kind of news even occurred while the market was closed. When stocks open a session on a gap, they tend to trade in the same direction of the gap. Day traders might buy a stock because it was gapping upward and, once they’re in, they ride the gap momentum to gains and then try to sell as close to the high as possible.

day trade stocks down gap

The same strategy also works with short stocks. A downward gap indicates that a stock is likely to go down further in the short-term, and short-sellers exploit this in the same manner as buyers.

Gap trading is not easy so don’t let this explanation fool you into a false sense of security. The open is the most volatile part of the day, so buying into a gap can sometimes go dramatically wrong. Like anything else, don’t go in without a complete strategy.

5. Understand Public Float

Most investors are familiar with the concept of supply and demand, but understanding how public float affects share prices eludes them. It may sound complicated but it’s actually quite simple. Float is the total number of investable shares available to the general public. Just like any other product, stocks are influenced by supply and demand. When public float, or the supply of the stock, is small it means that shares are in tight supply.

When supply goes down, prices generally go up. Stocks with lower public float are more likely to come into short supply and subsequently increase in price.

6. Monitor Open Short Interest in Day Trading Stocks

This figure measures the number of shares that are currently loaned out on short sells. A lot of shorts usually indicates that the market has poor outlook on a stock, but the market gets it wrong pretty frequently. When shorted stocks start gaining, short-sellers get nervous. The higher share prices go, the more they have to spend to buy back the shares they have to replace.

If high-short stocks make an abrupt upward move, it can create panic amongst short sellers to replace their shares. This increased buying actually can accelerate an upward move and create additional momentum towards higher prices. This scenario is called a ‘short squeeze’ and it usually pays off big for investors that are long in the stock. Open short interest ratios above 20% make a sweet setting for a possible short squeeze.

Best Day Trading Stocks: Closing Thoughts

Day trading is one of the most difficult niches of the investment world. It’s a high-stakes way to trade so it’s not for the faint of heart. This guide introduced you to some basic day trading concepts but, remember, it’s still up to you to do your due diligence. With a lot of practice and a little luck, you could one day be an effective day trader.

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