Introduction:
When beginning to learn how to
research stocks for day trading, one of the best places to start is, not
surprisingly, with research. The more you know about this innovative and
exciting investment vehicle, the more comfortable you will be with it. That’s
why we’re going to talk about the tools that you need to use when opening up a
brokerage account and preparing for your first day of trading.
Stocks can be volatile, but the day
trader foresees this. Research is key to being successful in the stock market
and you need to understand how to research stocks.
Trade
with risk management.
The first step to day trading is to choose a market you understand. A market that you
understand inside and out. This will help you make better trades as you’ll have
a good feel for the market.
The second step to day trading is to create a trading plan. You need a strategy and a plan
of action so that when you do start trading, you'll know exactly what you're
doing.
1. Find a day trading strategy that
works for you.
2. Learn how to trade with real
money (but keep your risk small).
3. Stick with it! Don't change your
plan or jump from one method to another!
Day
trading is a job.
Research is the first step to
becoming a successful day trader, and it's a job that never ends. There are
always new stocks to research, new financial developments, and markets to
track.
Day traders have to stay on top of
all these things, so they can make the best possible trades. But as we've said
before, day trading isn't for everyone. If you're thinking about trying it out,
read what follows very carefully and honestly ask yourself how well you'll be
able to handle the rigors of the job.
Protect
your capital.
Day trading is one of the most
profitable and attractive investment opportunities out there. But it can also
be risky if you don't take the time to do your homework.
The best way to approach day
trading is to not approach it at all. Instead, approach investing in stocks
for the longer term. As such, you'll be better able to enjoy the growth
potential stocks have over time.
If you still want to pursue day
trading, here's what you need to know:
1. Protect your capital. Start small
and manage risk first rather than focusing on returns. Don't risk more than
1%-2% of your account on a trade or else you could end up losing too much and
giving up altogether.
2. Trade with a plan, not emotions
or guesswork. Have a plan that defines when you will buy and sell stocks, how
long you will hold them, what criteria you'll use to determine when to sell and
how much money you're willing to lose before getting out of the trade.
3. Stocks with large institutional
ownership tend to move in the direction of the larger trend because
institutions move in bulk and can make it difficult for smaller players to
trade against them. If you want the market's direction, then these are three
stocks to watch.
Be
nimble and humble.
1. Read financial news sites like
the Wall Street Journal, Bloomberg BusinessWeek, Financial Times, and Yahoo
Finance each morning. See what's happening in the world of finance and stay
abreast of the latest trends. Find out which companies are getting involved in
events that could create volatility or upward movement in the stock price.
2. Look at a company's financial
statements over time if you really want to understand its business model.
One-quarter of great earnings doesn't make a great company, but five years of
consistently increasing earnings made through innovation and building market
share is telling me that this company has staying power.
3. Look at the price charts of
stocks that interest you over time to get an idea of how they've performed in
the past — especially during difficult economic times. This will give you an
idea of how they might perform in the future under similar circumstances.
Learn
the market.
Day traders make a living buying and
selling stocks on the same day. It's like gambling at a casino. Your winnings
are not subject to capital gains taxes. But your losses are unlimited. This is
why you should set loss limits and stick with them, no matter what happens in
the markets.
Here's how to research stocks for
day trading:
Learn the market. You can't just
dive into day trading without doing your homework first. Day trading
means short-term trades, usually of just a few days or weeks, so you'll have a
limited time frame to make money. You'll need to think fast and make quick
decisions, but if you're afraid or unsure of your next move, it could easily cost
you money.
Day trading isn't for everyone. It takes skill and discipline to profit
from day trading because it involves taking risks that can lead to losses as
well as gains (and you've got to be good at managing both). If you're
interested in learning more about day trading, Investopedia's Become a Day
Trader course provides an excellent introduction to day trading for beginners.
Don't
trade the first and last hour of the day
Traders tend to get lured into day
trading by the potential for big profits. But it's important to remember
that day trading isn't a get-rich-quick scheme. Rather, you're making small
gains over time based on the expected volatility of a particular stock, ETF, or
currency pair. Some important things to
remember when researching stocks for day trading:
Trade only liquid securities: If you can't find buyers or sellers within seconds of
placing an order, it probably isn't liquid enough for day trading.
Check volume: The higher the volume of shares being traded on a daily
basis, the easier it is to find buyers and sellers when you need them.
Watch spreads: When there's not much demand for a stock, brokers will
widen the spread between their "bid" and "ask" prices —
meaning that you could end up paying more than you should for your shares.
Don't trade the first and last hour
of the day: By 10:30 a.m., many stocks have
already made their biggest gains (or losses) for the day, so there's less
demand in the market overall; likewise, during afternoon selloffs, there are
fewer buyers to pick up stock as prices fall.
Don't
trust daytime highs or lows
For day trading, you need to have an
analysis of the company before you start. Don't trust daytime highs or lows.
Here are some of the things I look
at when selecting a stock:
1. A catalyst
2. Liquidity
3. Chart Indicators
4. Article History
5. Market Indexes/Sectors
6. Seasonal Tendencies
Learn
about technical indicators
Technical indicators are
mathematical calculations based on the price and volume of a security. Traders
use technical indicators to identify trends and important price points of where
to enter and exit the market. The most commonly used technical indicators are
moving averages, relative strength, and support and resistance.
Moving averages show the average
value of a security's price over a set period of time. For example, a 10-day
moving average takes the closing prices of the last 10 days and divides them by
10 to create an average. The average is then plotted as an indicator on top of
the price chart. A rising moving average indicates that a stock is in an
uptrend because it is trading above its average price. A falling moving average
indicates that it is in a downtrend because it is trading below its average
price.
Relative strength compares one stock
to another, or to a benchmark index like the S&P 500. It measures how well
one investment performs against another investment or benchmark during a
specific time period. Support and resistance levels indicate natural price
ceilings (resistance) and floors (support). They are plotted on charts when
stocks fail to move higher (resistance) or lower (support), showing heavy
buying at these levels.
Fundamental
Analysis for Day Trading
Fundamental Analysis for Day Trading: Fundamental analysis is the study of the overall state of
a business, usually by looking at economic and sales reports, earnings, and
growth potential.
Valuation ratios include
price-to-earnings (P/E) ratio, price-to-earnings-growth (PEG) ratio,
price-to-sales (P/S) ratio, price-to-book (P/B) ratio, and dividend yield.
Technical Analysis for Day Trading: Technical analysis looks at the data behind market
movements to see if there are patterns that can be taken advantage of.
Support or Resistance: If a stock is trading near a support line or resistance
line it means that it’s hard for traders to get past that line. If a stock is
close to a support or resistance line, it could be an opportunity to buy or
sell shares.
Trend Lines: Trend lines can be helpful in determining the strength of
the current trend. If the line has a steep slope, then the trend is strong in
that direction. If the slope is more gradual, then it shows that momentum and
strength are growing weaker.
Conclusion:
Researching stocks for day trading
can be time-consuming. Before deciding that you want to day trade, you should
know about the risks, as well as the potential to generate profits. It is not
easy by any means. You might want to consider joining a forum or group of
like-minded people who are learning how to day trade, as well as make some
mistakes so that when you do get started, you will have a stronger
understanding of what it takes to succeed.
Find the best stock broker by
researching stocks through a plethora of research tools and methods. These
include using brokerage firms, discount brokerages, independent research tools,
and research software. The most successful day trading strategies are
those that contain the key elements of timing the market, picking out
appropriate stocks for trading, executing a trading strategy to profit from the
swings in day trading stocks.
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