Day trading is when you purchase and trade a stock all within the same day. While day trading has its advantages, you only have a finite amount of time to leverage capital and reap potential returns.
While day trading can be beneficial for some investors, it's extremely risky for beginners or those who don't invest enough time and research into their tactics.
Here are five strategies to help you select the best stocks and maximize your returns:
1. Start Your Research Early & Study Stocks Throughout Day
When day trading, you must begin your research early in the day. Wake up early and get right to work. The market moves quickly. Begin by researching the premarket. During this time, consider the price, volume and volume average for the past 30 days of the stock you have in mind.
Not only should you perform extensive research in the morning, study your stocks at multiple times throughout the day. Once you've devised a game plan, don't deviate from it until the market closes. You have a short time period to make a profit with day trading, and if you aren't consistent with your strategy during the day, you could lose time and money.
2. Consider Stocks with High or Medium Volatility
Volatility, in the financial sense, is the degree of variation in trading prices over a period of time. The more volatile a stock is, the more room there is for profit and loss. High- volatility stocks involve a higher degree of risk. Beginners should look for stocks with medium volatility.
3. Choose High-Volume Stocks
When the trading volume on a particular stock is high, the stock has an easier time being traded. The volume of a stock is determined by how often it is bought and sold within a specified time frame – typically within a day. When a stock has high volume, it means that more people want it, making it easier to sell. High-volume stocks also have high liquidity.
4. Establish Price Limitations
An important consideration is your price target. You want to avoid day trading with a stock valued at less than $5. When the stock is cheap, you have less room due to tighter stops on your trade. The ideal price of a stock should range between $20 and $40.
Additionally, as you consider risk, never invest all or most of your capital in just one stock. Too much emphasis on one stock limits valuable opportunities that lie elsewhere. The Online Trading Academy suggests setting a percentage between 2 and 10 percent of your total day trading budget on each stock and not exceeding it.
5. Be Disciplined with Your Plan & Money
When the ratio of reward to potential loss is high, it's tempting to buy. However, choose stocks that fall within your strategy. When you disregard your strategy, you increase the risk of failure. Ensure your stocks fall within your price, volume, volatility, and that you're comfortable trading them.
Furthermore, never use money that you need for daily living expenses. Day stock trading can be a gamble. If you use money you desperately need, you're putting yourself in a bad financial situation. Only trade with money you can afford to lose if your strategy doesn't go as planned – no matter how good the stock seems.