Day Trading Skills - Assessing A Stock For Trading

FinanceTrading / Investing

  • Author Ron King
  • Published April 12, 2008
  • Word count 770

Despite the dire warnings by the Securities and Exchange Commission cautioning investors against the controversial yet potentially lucrative world of day trading, people want to try and acquire day trading skills, and a day trading stock tip is literally worth it's weight in either gold, or dross! The following is some information on learning trading techniques, the risk inherent in the system, and strategies for becoming a proficient trader.

Just what is day trading and how do investors gain day trading skill? Day trading is the system of speedily buying and selling stock throughout the day in order profit from the marginal changes in the market for that particular day. In the ideal world, day trading strategies let investors garner profits from the tiny increases in the market.

Day traders look at a specific set of indicators when deciding whether a stock is suited for day trading. First, the stock should have high liquidity. This means that the stock in question has a large number of buyers and sellers. The liquidity enables day traders to quickly acquire and then sell stock. Liquidity is determined by the volume of transactions on the market, the number of outstanding shares, the total number of shareholders and the number of market makers. Almost all stocks on the NYSE and NASDAQ have a high degree of liquidity.

A day trader also studies volume individually, in addition to using it as criteria for liquidity. To be eligible for day trading, a stock should trade at least 500,000 shares a day. Stocks with 500,000 trades a day or more will allow the day trader to purchase or sell a large amount of stock without greatly changing the price of the stock. Volatility is another issue in assessing a stock for day trading. The phrase refers to the actual or expected price movement of the stock. This movement is up or down over a period of time. Day traders study the pattern and volatility of stocks over an individual day. Stocks that change price several times over one trading day are ideal candidates for day trading. A fluctuation of at least $2.00 per day is recommended.

Finally, a day trader looks at the price transparency of stock. This term pertains to the ability to collect information on the order flow of a stock. Also called market depth, price transparency helps the day trader figure out just how much money there is to be made on a certain stock. The NASDAQ II quote system offers information on all bids. Day traders who arrange to access the NASDAQ level II quote screens can survey the performance of a stock and ascertain its swing in price.

While these trading strategies are completely legal and entirely ethical, they are extremely risky. Day traders usually buy on borrowed money with the hope that they will obtain higher profits through their acquisitions and sales. People who are determined to be "pattern day traders" by the NASDAQ and NYSE must have at least $25,000 in their accounts and can only trade in margin accounts. Margin accounts are brokerage accounts in which the broker lends the investor cash to purchase securities. If the value of the stock drops a great deal, the investor is required to deposit more cash to cover the margin or sell the stock. The SEC discourages day trading and acting on a day trading stock tip, and has taken many steps to inform people of the corresponding risks.

The first few months, a vast majority of day traders have massive financial losses and only a handful make it through to become profit-making day traders. For this reason, day traders should only invest cash that they can afford to lose. They should never invest money earmarked for necessities such as living expenses or education funds.

Remember that day traders do not own stocks for longer than a few minutes at most. Stocks are never kept overnight because of extreme risks of prices changing to the detriment of the trader. Day traders do not invest, instead, they speculate on the movement in price of a stock throughout the day.

There are numerous websites whose sole purpose is to make their living from those who seek a day trading stock tip. These websites assure speedy results and offer hot tips to their members for a fee. The sources are usually paid to make these recommendations and must be avoided. Enlist the advice of a proven professional, and take plenty of time to learn trading strategies for longer term success. Remember, there is no free money, and day trading skill is often paid for with debilitating stress and cataclysmic losses.

For a wealth of free info on understanding stock trading, check out the articles at Stock Trading Information Resource, or make sure to read The Wall Street Journal - my #1 pick for stock information.

Copyright 2008 Ron King. This article may be reprinted if the resource box is left intact and the links live.

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