How To Choose Stocks For Day Trading

choosing spy as the best stock to day trade

One of the first steps to becoming a successful day trader is learning how to choose the best stocks to trade so you have the best chance at winning. This is a crucial part of the process that you should not overlook. Think about the stock you choose as your opponent in a battle; you would want to go up against the easiest opponent to increase your chances of winning, so make sure you do the same when picking what stocks to day trade. Here we will look at the key aspects you need to consider to set yourself up for success. If you are a beginner, make sure to check out our day trading basics guide for more tips to get you started on the right path.

Lots Of Liquidity & Tight Spreads

The first thing you should look at when picking which stocks to trade is the amount of liquidity there is and how tight the spreads are. The more participants there are in a market, the tighter the spreads will be. The spread is the difference in price between buy orders and sell orders, so when there is a large gap between the nearest buy and sell orders, you will lose money right out of the gate when placing your trade because of how big the gap in orders are.

So, even if you wanted to get out right after you placed your entry, you would need to exit at the nearest opposite order. For example you buy a stock at $101 but think the market is going to turn around so you decide to get out and the nearest buy order is at $95. This means you will lose $6 just because the spread was large. Don’t make this mistake. Always choose stocks with tight spreads so you don’t cost yourself extra money when your trade goes against you.

Liquidity is the amount of orders available in the market and the more market participants there are with deep pockets, the tighter the spreads will be in most situations. So look for stocks that are popular among traders and have a lot of liquidity. Some examples of stocks with good liquidity and tight spreads are: SPY, QQQ, APPL, META, MSFT, NVDA, AMD and TSLA. All of these stocks have a lot of day traders involved in the markets, so there are plenty of orders going back and forth at all times, giving you very tight spreads and the best possible environment for day trading.

Decent Volatility

Never trade stocks that aren’t volatile. Volatility means that the stock moves up and down nicely, without much sideways movement. Granted, there will always be some sideways movement when stocks are consolidating and traders are waiting for better trading setups, but try to avoid the sideways price action and only trade when the market is clearly moving in one direction. And of course, make sure you trade in the same direction as the trend.

Trying to trade stocks that aren’t volatile is how you get stopped out easily and you also have to wait for longer periods of time to see if your trade is going to become profitable or not. This creates stress, anxiety and makes you more likely to get out of the trade with a loss if you can’t control your emotions when trading. The emotional roller coaster that comes with trading is something you always want to try to eliminate as much as possible and you do that by only trading volatile markets. This allows you to get in and out of trades quickly and reduce your anxiety levels. Getting quick profitable trades consistently will also build your confidence and help reduce your anxiety even more.

Avoid Ranging & Sideways Markets

One of the hardest things to do in day trading is knowing when not to trade. When a market is just moving sideways and price just bounces up and down without showing a clear sign of lasting direction, don’t place any trades. Ranging markets will eat up your profits very quickly and it will also make you lose confidence in your trading and your strategy.

Look for trending markets and trade with the trend to ensure you are giving yourself the best chance at success. There will be times that you will get caught in sideways price action and you will need to be patient and let your trade play out, but always use a tight stop loss to limit the amount of losses you take if your trade idea turns out to be wrong. Remember, the trend can change at any time, and sometimes the reversals can be extremely quick, so always have a stop loss set.

If you decide to trade during ranging price action, you can take an approach called range trading which is where you buy at the bottom of the current price range and sell at the top of the price range. This should not be done by novice traders though, as it takes a lot of practice to learn how to identify ranges and trade them effectively. Overall, you should stay away from range trading completely until you are a very experienced trader and are comfortable with this type of trading.

Avoid Choppy Price Action

Choppy price action is a portfolio killer, plain and simple. When price is quickly moving up and down and never moving in a clear direction for long lengths of time, it can become very difficult to figure out what trades to take and even more difficult to exit those trades profitably. Watch out for large candles up, followed by large candles down and vice versa. We want to avoid trading this type of price action because it is extremely easy to get stopped out over and over again when price action is choppy. Watch the charts for a long period of time and get used to identifying choppy price action and ranging markets so you can make good decisions on whether the market is safe to trade or not.

Ride The Trend

Trend trading is one of the best ways to give yourself a high probability of winning your trades because the market has already shown that it wants to move in a certain direction. So by waiting for pullbacks and then entering the trade, you give yourself an excellent entry that you can use a tight stop loss on and effectively limit your losses while maximizing your gains.

You can also scale into your position when the market agrees with your trade direction and add shares to your position to increase your profits. Just make sure to trail your stop loss and lock in profits along the way so you don’t let a winning trade turn into a losing trade. Remember, patience is key in trading so wait for the trend to establish itself, then wait for a pullback and enter. The trend is your friend, so make sure to use it to your advantage because trading is not an easy thing to do profitably and stacking the odds in your favor is the best way to become a profitable day trader.

Use A Scanner To Find Trending Markets

Many trading platforms have scanners that you can use to look for high trading volume, big gainers and trending markets. Use these scanners to your advantage to find the stocks with the strongest trends and trade those. Some days certain stocks will be on the move because of news or earnings and using a scanner can help you identify those without having to pay attention to every detail of every stock. Tradingview has a free scanner that lets you fully customize what you want to scan for, so make sure to familiarize yourself with that and use it to find the best possible stocks to trade. We also have indicators you can use to scan the markets which can be useful as well. Check out our Buy Sell Signal Scanner for yourself here.

Pick Stocks That Work Well With Your Trading Indicators

We all use trading indicators on our charts to help us make better trading decisions, but some indicators are built specifically for certain markets. If you are using any indicators that are designed for specific stocks or types of markets, make sure to stick to trading the markets that your indicators are designed for. Go through your charts and look at various different stocks and see how your indicators perform with each stock. If there are certain markets that the indicators perform best with, trade those stocks on a regular basis so you can improve your chance of success. Day trading is a very hard profession, so any edge you can get is a valuable one.

Find Stocks That Fit Your Portfolio Size

If you are trading with a small amount of capital, then you won’t be able to trade shares of some of the more expensive stocks because their share price is just too large for your account size. For example if you only have $500 dollars in your account, try to stick to trading stocks with a price that is less than $50 so you have room to take a few losses without losing all of your money. Risk management is a key aspect of trading profitably, so buying stocks that use all of your capital can quickly lead to large losses and blow your account faster than necessary. If you don’t have enough money to buy at least 10 shares of that stock, then you should look for other stocks that are cheaper.

Get Familiar With The Stocks You Trade

No matter what stocks you decide to trade, it is extremely important you familiarize yourself with how that stock likes to move. While all stocks have some similar characteristics, some stocks will act very differently and it can be easy to get caught off guard when these wild movements take place. Make sure to spend a lot of time looking at the previous price action of the stock, going back days and even months into past charts to get an idea of how this stock likes to move. Watch for patterns in their movements and take note of those so you can use them to your advantage when they present themselves again and you are ready to trade. Just like how sports teams watch prior footage of their opponents to get an edge, you should do the same with the stocks you plan on trading so you have a good chance at profitably trading.

Watch For Stocks That Beat Earnings Estimates

Another thing to pay attention to is earnings reports dates. Publicly traded companies are required to report their earnings to the SEC and when companies have excellent earnings reports that beat the expectations and prior earnings, it is likely that the stock will start moving in an upward trend because the value of that company is going up due to their increased profits. This can be an easy win for your day trading strategy, but don’t get greedy. Many times small gains in earnings compared to previous reports will not be enough to get the stock to move upwards at a decent rate, so try to wait for earnings reports that are much larger than expected so you can catch the stocks that will actually move up.

Good News For The Company Can Start An Upward Trend

When a company makes a strategic acquisition, reports large profits or does anything else that will likely be great for business, this can cause traders to start buying shares in anticipation of the stock moving up. This can be an excellent time to take a position and wait for the stock to start pushing upwards, giving you an easy win. But be careful because good news doesn’t always mean prices will go up. Sometimes it takes days or weeks before the stock reacts to the good news and you will have to wait it out or exit and move on to another stock.

Find Stocks That Move Together

Many stocks will move in the same direction at nearly the same time on a regular basis such as QQQ and SPY. This can be a great indicator of what the price is about to do next and can help you anticipate moves before they happen. Sometimes one stock will start a reversal slightly earlier than the other one, which can give you a heads up to watch for the reversal on the one that is lagging behind a bit. You can also use the other stocks as an indication of how strong the overall trend is for that market sector which can help you hold trades longer and maximize your profits.

Stay Away From Overhyped Stocks On Social Media

Recently, there has been a wave of traders trying to capitalize off of the movements of hyped up stocks like Gamestop. This is due to a group of traders that vowed to keep buying and never sell with anticipation that the stock will just keep going up and make everyone a large profit. However, the banks and hedge funds know these things and have much more capital to work with that they will use to trade against the retail traders. When large amounts of retail traders push a stock up, the hedge funds will be more than happy to take profit and sell into all of the retail traders’ buy orders. But since they have way more shares than any of us day traders do, their order volume will completely eliminate all of our orders and push the stock back down very quickly.

Hedge funds take profits when they are at levels that are not probable for a stock and this can create a windfall of sell orders that bring the stock crashing down at a very fast pace, leaving retail traders that bought at the top with large losses so they are afraid to get out. This is why you will see large rallies in price that end up coming right back down to where price started in a few days. Don’t make that mistake. Be a smart trader and always stick to your strategy. Following overhyped stocks plays on social media is gambling and will likely destroy your portfolio.

Putting It All Together

Give yourself the best chance at winning by following the steps we talked about above. Find stocks with tight spreads and lots of trading volume so you don’t lose money just due to the spread or low liquidity. Wait for favorable market conditions with decent volatility before placing trades and always avoid ranging/sideways moving markets. Use a scanner to help you find stocks that have abnormally high volume or are making big moves and ride that trend. Always trade with the trend and avoid choppy p[rice action. Stop gambling on hyped up social media stocks and stick to your day trading strategy. If you can combine all of these characteristics together, you have a much higher chance at consistently profitable trading than 90% of traders.

At Trend Friend, we want you to be profitable traders, which is why we made this list. We follow all of these rules ourselves when day trading, so do your best to get in the habit of giving yourself the best chance at success and you’ll make this journey a lot easier on yourself. And remember, the trend is your friend!

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