How To Choose The Right Stock

Now that you have taken your time in analyzing your risk appetite and have a general knowledge of how you will minimize your risk in day trading, let us now discuss how you will find the stocks that might be right for you. There are lots of stocks in the market and going over them one by one is kind of overwhelming. You will not be able to finish studying them all even if you pull out an all-nighter. So what do we do to know the right stock that we will be studying for the day trade?

NARROW DOWN YOUR SEARCH

Since you are still starting, you may begin by narrowing down your search. You could filter the stocks by sector or industry, then work your way from there. For example, healthcare is one of the sectors that comprise all companies that focuses on healthcare. Then pick 3 or 5 stocks and study their charts. The movement of these companies usually mirrors the movement of that particular sector. By studying these few stocks, you will be able to get a feel of how it is moving in the market.

LIQUIDITY AND VOLUME

When you are actively participating in the financial markets, liquidity is your friend. Liquidity refers to how quickly a security can be purchased and sold within a certain duration of time. Since you will be day trading, you must look for stocks that can be easily traded. You wouldn’t want to be holding a stock outside your time horizon so focus on the stocks that are always on the move. Also, liquidity helps you move from one stock to another so you could maximize your profit-taking.

MEDIUM TO HIGH VOLATILITY

Volatility is defined as the rate at which a security’s price varies and changes. When you begin your day trading, you will need to ride the volatility to take profit. A good rule of thumb when measuring volatility is it should be less than 5% price change on a day-to-day basis.

However, highly volatile stocks are oftentimes unpredictable. If you choose a stock with high volatility, keep in mind that you may be more prone to losses. Even with the most research trading plan fails if the market goes opposite your analysis.

 

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