Selecting a stock to trade depends on many things. Trading style, experience and capital being the three major factors. But first, there are a few things about stocks that you need to remember. Every stock has different levels of volatility and speeds at which the price changes. They all have different characteristics, and it’s essential to have the proper tools to analyse them before buying quickly. Here’s what to look for in a stock:
One thing you want to look for is liquidity/volume. Liquidity is significant when looking at a stock. A standard rule of thought for active traders is to trade stocks with at least 1,000,000 in daily volume and for many that amount is too small. That means enough buyers and sellers are available for that stock so as a trader you can get in and out when necessary. Traders need enough stock volume to enter and exit trades quickly, or they can get stuck in a position and incur a significant loss.
If you’re into day trading then unlike most investors when you hear the word volatility you’re more intrigued than worried. A movement of up to 2% per day for most traders is bearable, but some traders enjoy trading stocks with over 5% movement in a day. The successful trading of volatile stocks depends significantly on experience and the reliability of your trading platform and brokerage. The most common way to determine a stock’s volatility is by using Beta. Beta is a score that measures a stock’s volatility against the market. When comparing against the S&P 500 Index, which has the number 1, if a stock is more volatile than the market the beta will be more than 1. If the stock is less volatile than the market, its beta will be less than 1.
Tend to the trend
Find stocks that are trending if you are trading using a trending strategy. Trading the trend is what it sounds like it means. You are looking for upward or downward movements that create a pattern.
Reach for the range
If you are trading the range, find stocks that tend to range. A range pattern occurs when a stock experiences some up-and-down movement, but no definite trend to the upside or downside.
Now that you know what you’re looking for in a stock, here’s how to find the stock.
The scanning of stocks is probably the best and fastest way to find stocks that match your stock requirements. There are thousands of stocks available for trading, but you already know, based on the above information, what you are looking for in your stock. Filters help to narrow down the search to find stocks with the characteristics you want.
One of the most popular free stock screeners is Finviz.com. To use the site, click the “Screener” tab and add criteria from the three major sections of the drop-down menu: Descriptive, Fundamental, and Technical. Once you’ve chosen your filters, the site creates a list of US stocks matching your criteria. You can then change the view of the information of the listed stocks. Choose between: Overview, valuation, financial, ownership, performance, technical, custom, charts, tickers, basic, TA, news, snapshot and stats. After analysing the data select your stock(s) and prepare to trade.
As a day trader, it is important not to get caught up in the researching of stocks during your trading day. Research is essential, but most free screeners are giving delayed data which means that the move has already occurred. Therefore, scanning for stocks should take place the night before as you plan out your trading strategy for the next day.
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