Which stocks do day traders trade the most? Well this is not an easy question to answer however I will give you some incites as to the constituent components that determine whether I consider a stock for day trading and, more importantly, why. As you know daytrading is an activity that you must constantly adapt yourself to and let me just say at the outset that it is not suited to all personalities. Daytrading is a speculative, high risk activity and is not suitable for many investors however if the correct strategy, selection criteria and mental attitude is applied it is a beast that can be tamed.
We daytrade to make money and, without pointing out the obvious, you can’t make money on a stock, whether it is registered on NYSE or NASDAQ, if it does not move. Therefore the first criteria that I apply to stock selection are that a stock must be volatile.
Volatility and the Average True Range
Volatility refers to the degree of unpredictable change over time of a certain variable, the bigger the risk or stock volatility is, the bigger is the return on investments for that stock. The volatility of a stock is measured by its average true range (ATR) which is simply an average of the true range values over a period of time. The timeframe that I am interested in is 5 minutes and 1 minute therefore on my 1 minute and 5 minute charts I will have the ATR for that particular stock on both timeframes. I will not consider trading a stock that has an ATR of less than 0.10 on the 5 minute chart this is because it’s not moving enough (what this means is that the stock moves an average of 10 cents in a 5 minute timeframe). Typically I will be looking for an ATR of between 0.20 and 0.30.
Stock Volume - Liquidity
It is no good buying (or shorting) a stock that you cannot sell once it reaches your target price or sell signal. It may have an ATR that is acceptable to you and you may have made a $1.00 gain (per stock) in less than 5 minutes but what happens when you come to sell and there are no buyers? A stock has to show some liquidity to enable you to offload when you want to and at the price you want to and for this reason I will not consider trading a stock that has an average daily volume of less than 800,000.
Morning Gappers
I trade 2 time periods intra-day and never trade during the midday doldrums when most traders are out at lunch and stocks just move sideways for 2 hours. When I trade the opening hour I look for stocks that have gapped up more than 3% in price from their previous closing price as this means that the stock has shown some early volatility. However they must have good pre-market volume, that is to say that they must have had enough buying and selling activity before the session opens, and they have not gapped too far. Gappers that have gapped up over 10% tend to just move sideways at the open. The reason I trade morning gappers is down to the fact that they have a degree of volatility and I want to feed off that volatility, remember volatility = interest and interest = movement.
Day Runners – Afternoon Breakouts
The second part of the day that I trade is the last 2 hours when I am looking for stocks that have good volume and have either gained or lost more than 4% on the opening price. I am looking for a steady increase in the stock’s price in the morning session followed by a sideways move during the midday and then for the stock to “breakout” of its daily highs (or lows) that were established in the morning session. The stock must show an increase in volume as it breaks through the daily high or low, this can be clearly seen if you have moving average volume shown on your 5 minute chart for a particular stock. It can also indicate that there is some institutional investment in that particular stock.
It is difficult to illustrate a trading style and strategy in a single article and I have not attempted to do that in this article however what I have shown is the basic criteria that I use in order to determine which stocks to daytrade and why. In my experience many of the successful individuals that trade momentum stocks on a daily basis tend to focus on volume (liquidity), ATR, morning gapers and afternoon breakout stocks.
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