Trading Stocks For Beginners: Top 3 Tips To Pick The Best Stocks To Day Trade

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Trading Stocks For Beginners: Top 3 Tips To Pick The Best Stocks To Day Trade

When trying to choose which stocks are best to trade, the decision can be overwhelming… there are so many different stocks on so many different indices, that it can be a major challenge in your trading just to narrow down the choice to something manageable.

In this video, I’m going to show you my top 3 tips to pick the best stocks to day trade, so that you can narrow down the choice by using these three simple tips to evaluate any stock you want to trade.

#1: Look For High Volume

As traders, we need high volume. If we choose thinly traded stocks, this gives rise to a very big problem… lack of liquidity. Liquidity is a measure of how simple it is to buy and sell a stock quickly at its market price…

In low-volume stocks, large orders can cause unpredictable swings in the price, and you can find yourself in a difficult position when trying to exit a trade at the price you have set. Even stocks that trade at high prices and are considered large-cap can have low trading volume, so no matter what you trade you need to watch out for volume.

A great way to find out if a stock has high enough volume to trade is to look at the ADTV, the Average Daily Traded Volume, which is a measure of the number of shares traded per day averaged over a number of days in the past. You want to look for stocks that are trading at least 10,000 shares per day. There are a number of free online sites (like Yahoo Finance) that provide this type of information, but another very good idea is to have this information up on your trading charts by adding a volume indicator. This gives you a visual and numerical look at the average volume traded in that stock.

#2: Calculate The Volatility

Ignoring volatility is a common but deadly-to-their-profits mistake that many traders make. Volatility is a measure of how much a stock moves in a given time period. The reason it is so important is this…

Let’s say you make a long trade in a $10 stock, and you set your stop at $9, and are looking for a 3 to 1 profit target — so for the stock to move to $13. Also, you don’t like to hold overnight positions so you are hoping for the trade to hit your profit target that same day. Great, sounds good right? The problem comes in where you don’t look at volatility… let’s say the average volatility of this stock only has it moving a couple of cents a day. You could wait forever for your trade to get to the profit target you set. It’s just not going to make it to your profit target in a reasonable time frame with that average volatility.

Just like with Volume, you can get Volatility numbers for the stocks you want to trade from a few free services online. But I like to do things on my charts, and on the charts the ATR indicator is a great way see the volatility of the stocks you trade. Once you’ve calculated the ATR, you can set realistic trade expectations, since you will know what to expect in terms of movement from the market in the trade you put on.

#3: Consider The Price

Using price to determine which stock to trade can be dangerous, yet it is also a hugely important consideration. Stocks range from nano and micro-cap to small cap, mid cap, and large cap. Cap refers to Market Capitalization which is equal to the Current Stock Price x The Number of Shares Outstanding…

A lot of traders starting out with small account sizes are drawn towards the smaller cap stocks, since their price often allows the purchase of a greater number of shares…however, this can be a dangerous direction to go in the markets since there are many associated risks that come along with trading smaller cap stocks, such as their lack of regulatory oversight and relative obscurity.
It’s a good idea to set a price-level below which you won’t consider a stock for trading, for example $20. However, if you still do want to trade smaller cap stocks, one way to lower the risk of doing this is to consider what you’ve learned so far in this video about volume and volatility. There are small cap stocks that still have decent volume and volatility, so making sure that the lower priced stock you want to trade meets your criteria for volume and volatility is a great way to improve your odds of success.

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