Day Traders Favor Stocks With High Liquidity, Trade Volume, and Volatility

Day Trader Stocks

There are certain stocks that suit the day trading style better than others. Successful day traders know what these characteristics are and apply this knowledge to their trading techniques.

Characteristics

Good stocks for day trading have what is called liquidity. Liquidity is a term used to define a stock that has a substantial amount of buyers and sellers and allows a day trader to buy and sell the particular stock quickly. High liquidity also reduces the difference in the bid and ask price, which can cut down on costs to the day trader. There is no concrete measure of liquidity but there are factors that contribute. These factors are the volume of transactions on the market, the number of outstanding shares, the number of share holders, and the number of market makers. With all these factors, higher is considered better and translates into more liquidity.

Volume and Volatility

Volume is a factor in liquidity that can be easily measured and thus, makes it an important tool to evaluating a stock. The typical day trader’s stock should trade a minimum of 500,000 shares per day. This allows a day trader the freedom to buy and sell large quantities of stock. Volatility is another key component to a suitable day trader stock. Volatility refers to the amount a stock’s price fluctuates during a given time frame. Due to the short term nature of day trading, stocks should be evaluated based on their daily fluctuations. A stock that does not move up or down a substantial amount on a daily basis is not a good option for the day trader. Day traders rely on the quick fluctuation of a stock’s price and focus on getting in and out quickly. A good stock has at least a change of $2.00 during a normal day of trading.

Price Transparency

This is another term for market depth and refers to the ability of a trader to obtain knowledge concerning the order flow of a stock. This information is only available to the market makers when dealing with stocks of the New York Stock Exchange (NYSE). However, the average day trader can obtain information about order flow when using Nasdaq level II quote screens. This makes most stocks on the Nasdaq preferable candidates to stock on the NYSE.

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