Depending on their preferences, day traders may consider different factors while selecting stocks to trade. Key factors include volatility, volume, technical levels, upcoming earnings announcements, and market sentiment.
Volatility
Sudden price fluctuations may attract short-term traders looking to capitalise from those price swings. If a stock is volatile, it is likely to remain volatile as long as people trade it. Day traders might focus on stocks that move a lot in a single day or on stocks that move a lot most days.
While volatility might be seen adversely by day traders, from another perspective, they can benefit from trading numerous times each day as short-term patterns emerge.
If a stock has limited price fluctuations, there is less trading potential since the difference between the entry and exit prices are likely to be insignificant. Entry and exit points may be further apart for a volatile stock, providing more room for opportunity.
Volume and liquidity
High trading volumes and subsequent liquidity allow day traders to easily enter and exit trades in a single day. Higher volume usually means a tighter spread, which is also helpful for day traders. As a result, day traders often focus on equities that frequently trade multiple millions of shares daily.
Volume spikes can be used to identify stocks that are receiving a lot of attention. Day traders keep an eye on these stocks since the higher activity may present opportunities to get in and out quickly. Volatility and high trading volume are frequently observed simultaneously.
Setups for technical analysis
Technical analysis setups can help day traders decide what to trade and when. For example, if a stock's price approaches a support level, it may offer a buying opportunity if it rebounds off of it or a short trade if it breaks below that support. Similarly, a resistance level may present a shorting or buying opportunity.
Day traders may search for chart patterns such as ranges/rectangles, head and shoulders patterns, trend channels, triangles, or wedges, to mention a few. Price action and other technical indicators may provide trading opportunities.
Earnings Reporting
Stocks are notoriously volatile following an earnings report. The four days each year when a business declares earnings are the busiest trading days for many equities.
Day traders may try to trade the announcement's aftermath. Whether profits are higher or lower than expected by analysts may give some insight into the stock's consequent price direction. However, this should not be the only factor since some traders are comfortable taking positions on rumours too.
Trading before the announcement is risky since the price may gap after the news. It is conceivable that the price will gap through a stop-loss, resulting in a larger loss than expected.
As a result, day traders often enter at least a few minutes after earnings are announced. That is when the spread begins to narrow again, but there will still be a lot of volatility and trading opportunities over the next several hours.
Active day trading stocks can generate a lot of social media discussion. Examples include so-called meme stocks such as GameStop and AMC Entertainment.
Google Trends also gives statistics on online searches, which can help identify companies that are attracting the most attention and, as a result, may be worth considering for day trading.
Remember that high interest in a particular stock might be a negative indication. Research has found that a high number of online searches in Google Trends for a specific stock can often coincide with at least a short-term top in the stock price.
