Day trading involves buying and selling stocks within the same trading day, aiming to profit from short-term price movements. To be successful at day trading, it’s crucial to identify and select the best stocks that offer ideal conditions for intraday gains.
While there are thousands of stocks to choose from, not all make for good day trading candidates. The best day trading stocks generally share certain characteristics that make them ripe for short-term trades.
Follow these tips when screening for the top stocks for your day trading watchlist:
1. Look for High Volume
Volume indicates the total number of shares traded in a stock over a period of time. Stocks with high average daily volume provide ample liquidity, allowing you to enter and exit positions with ease.
Thinly traded stocks with light volume can be difficult to trade, as any significant buy or sell pressure can lead to exaggerated price swings. Look for stocks averaging at least 1 million shares daily. Many active day trading stocks see 5-10 million shares traded per day.
Platforms like Yahoo Finance and Google Finance offer volume data. Your brokerage account should also provide real-time volume statistics.
2. Target Higher Volatility
Volatility refers to the magnitude of daily price fluctuations in a stock. More volatile stocks experience wider price swings, both up and down. This volatility allows for bigger profit potential in day trades.
Look for stocks with a beta over 1, which indicates greater volatility than the overall market. An ideal beta range is between 1 and 3. Be wary of stocks with a beta over 3, as the extreme volatility poses risks.
You can screen for volatility using metrics like average true range (ATR), standard deviation, and past price swings over different timeframes.
READ ALSO: 10 Small Cap Stocks with Huge Potential in 2024
3. Check for Larger Price Moves
The daily trading range is the difference between a stock’s intraday high and low price. Larger average price moves allow for bigger potential gains (and losses) in day trades.
Scan for stocks that tend to move $2-5 on average each day. Also, look at the percentage range from high to low. Ideal day trading stocks fluctuate 2-5% daily.
A stock’s beta can provide a good starting point for assessing expected price moves. Analyze historical price charts to determine a stock’s normal intraday trading range as well.
4. Focus on Momentum
Momentum describes a stock trending strongly in one direction, either up or down, over a period of time. Ride the momentum via day trades in the prevailing direction.
Indicators like moving averages (e.g., 20 and 50-day), MACD, and RSI help identify momentum. Look for consecutive higher highs and lows on the chart, indicating a directional bias.
Be prepared to switch bias if momentum shifts – never fight the tape. Avoid trading stocks without a clear momentum bias until conditions improve.
5. Prioritize Liquid Sectors
Certain sectors offer greater liquidity and daily trading opportunities. Technology, healthcare, financials, and energy stocks tend to have high average volume and volatility.
Conversely, defensive sectors like utilities and consumer staples feature lower volume and more modest price swings. Focus your day trading on liquid sectors with natural intraday movement.
You’ll also find more stocks correlated within the same sector, allowing you to switch between related stocks easily. Trade the one with the best setup among its peers.
6. Use Hot Lists and Scanners
Many trading platforms feature built-in stock scanners and pre-defined lists of “hot” stocks for the day. These can serve as a starting point for discovering potential day trades.
Common scans include the largest percentage gainers/losers, most active by volume, new highs/lows, overbought/oversold, and halts/resumptions. The best setups often emerge within the first hour of trading, so run scans frequently.
Your broker should provide screeners. Finviz also offers free stock scans. Set appropriate filters for volume, volatility, price, and performance when scanning.
7. Don’t Overlook Small Caps
Small cap stocks with market caps under $2 billion offer advantages for short-term traders. Many feature high volatility and sensitivity to news events. Their lower liquidity also leads to exaggerated price moves.
Be selective when trading small caps – stick to ones averaging 500k+ shares daily and avoid penny stocks. Use limit orders over market orders. Scale position sizes appropriately to control risk.
Smaller stocks require more caution but can deliver outsized returns. Screen for small caps with strong price momentum and high relative volume for intraday trades.
8. Watch the News and Events
Scheduled events like economic reports, FOMC meetings, and company earnings lead to volatility, which day traders can capitalize on. M&A announcements, analyst actions, and other news also move stocks abruptly.
Follow financial calendars so you’re aware of upcoming events that may impact related stocks or sectors. Around major news, be ready to trade the volatility in the first minutes after release before it gets priced in.
Sign up for news alerts and set up email/text notifications for the stocks you’re tracking. Follow key business media outlets like Bloomberg and CNBC.
9. Understand Chart Patterns
Recognizing chart patterns and indicators that tend to precede price breakouts or breakdowns will improve your timing for getting in/out of day trades.
Watch for classic patterns like flags, triangles, channels, and double tops/bottoms indicating consolidation before major moves. Use technical indicators like moving averages and RSI to spot overbought/oversold signals.
Studying price action on both long term and short term time frames will sharpen your pattern recognition skills for daily setups.
10. Keep Emotions in Check
Beware of emotional biases impacting your intraday decision making. Fear and greed lead to poor trade entries and exits. Stay detached when day trading – stick to your plan and strategy.
Don’t chase trades out of FOMO or cut winners short out of fear. Establish trade plans when calm before the open, not in the heat of battle. Accept losing trades as part of the game.
Cultivate discipline, patience, and consistency. Emotional maturity is just as important as trading skills for day trading results.
Key Factors to Consider in Stock Screens
Use screeners to methodically scan for stocks that meet your criteria. Key factors to consider when filtering include:
- Volume – Look for average volume over 1 million shares, ideally 5M+
- Beta – Screen for beta between 1-3 indicating higher volatility
- Price – $5 to $500 range provides optimal variability and accessibility
- Percentage Range – Target stocks moving 2-5%+ intraday from high to low
- Market Cap – Mid caps ($2B-$10B value) offer a balance of liquidity and volatility
- Catalysts – Earnings, product releases, analyst actions, economic data
- Sector – Focus on historically active sectors like technology, energy, and financials
- Indicators – Moving averages, MACD, and RSI to confirm upside/downside momentum
READ ALSO: The 10 Best Stocks to Buy for Growth in 2024
How to Trade Hot Day Trading Stocks
Once you have a watchlist of quality day trading stock picks, the next key is identifying opportune entry and exit points. Here are some tips:
- Trade in the direction of the trend – don’t fight momentum, go with it
- Wait for pullbacks to trendlines/moving averages to get in at support levels
- Buy breakouts above resistance for new upside momentum
- Take quick profits – set a gain target, e.g. 2-3% and sell once reached
- Use stop losses to limit losses – exit with small loss rather than big loss
- Size positions appropriately – don’t risk more than 1% of capital per trade
- Review daily charts to identify key support and resistance levels
- Use limit orders over market orders to control entry/exit price
To Recap
Day trading offers opportunities to profit from short-term price action but also comes with risks that require prudent stock selection and risk management. The best day trading stocks have ample liquidity, volatility, and momentum.
By scanning for stocks using volume, technical indicators, news catalysts, and other criteria, traders can develop a customized watchlist to trade. Disciplined entries, quick profit-taking, and stopping losses are key to optimizing win rates.
It takes practice, screen time, and learning from mistakes to master day trading. Start trading small to get a feel for reading price action and managing intraday positions. Day trading well takes skill development but brings exciting rewards.
Focus on refining your skills rather than making money initially. With the right stock selection approach, risk management tactics, and trading psychology, day trading stocks successfully is an achievable goal over time.
Frequently Asked Questions
What is the best day trading platform?
Some of the top day trading platforms include Thinkorswim, TradeStation, Lightspeed, E*TRADE Pro, and Webull. Key features to look for include level 2 quotes, real-time analytics, custom scanners, backtesting capabilities, and mobile app trading.
What is the minimum capital required for day trading?
You need at least $25,000 to day trade frequently under the Pattern Day Trader Rule. However, starting with $100,000 or more provides flexibility. Having ample capital allows you to trade multiple positions in different stocks and withstand some losses as you refine your strategies.
How much money can you make from day trading?
Daily profits for an active day trader typically range from 1-3% of account size on average. So with a $100,000 account, target gains range from $1,000 to $3,000 per day. Some days you may lose money; other days you’ll earn larger returns. Focus on consistent execution.
What is the best time of day to day trade?
The most active trading times are the opening hour after 9:30am EST and the closing hour leading into 4 p.m. EST. These times see surges in volume and volatility favorable for day trades. Other good times to trade are around 10:30am EST after the opening move settles down and from 2-3pm EST when a second wind often picks up. Avoid low volume periods, like lunch hours.
What is the win rate for day traders?
The win rate for profitable day traders typically ranges from 50% to 60%. No trader wins 100% of the time – losing trades and small losses are inevitable. By managing risk on each trade and cutting losses quickly, you can still achieve consistent overall gains with a 40% to 50% win rate.
In another related article, 10 of the Best Stocks for Options Trading in 2024
