With all the volatility we have experienced in the stock market over the last few years, short term trading and day trading have become more popular ways to make money in the stock market.  However, selecting the right stocks to day trade can be a daunting task, since there are over 10,000 stocks to choose from.  This article provides tips for identifying stocks to day trade in the U.S. stock market.

The first consideration when selecting stocks to day trade should be liquidity.  In other words, you should only trade stocks that have sufficient daily volume, so that you don’t have to worry much about executing your trades.  Trading thinly traded stocks will result in slippage, which eats into your trading profits.  It is recommended that a day trader stick to trading stocks that have an average daily volume of at least 500,000 shares.

The next consideration is to trade stocks that offer sufficient volatility. Trading a slow moving stock will not provide much opportunity for profit, especially if you are trading less than 1,000 shares.  It is a good idea to identify stocks that have higher than average volatility.  A good rule of thumb is to stick to trading stocks that trade within a daily range of at least 5% of their stock price. 

Another important characteristic that a day trader should look for in a stock is one that has an obvious directional bias.  For instance, if a stock is trading within a clear uptrend, that trend will have a tendency to assert itself at some point during the trading day.  Conversely, if a stock is trading within a downtrend, that downtrend will tend to assert itself at some point during the trading day.  Ideally, you want to put the odds in your favor by trading with the underlying trend.  One mistake many day traders make is that they simply trade intraday breakouts that have a likelihood of failure because they are breakouts in the wrong direction.

Finally, another characteristic of a stock that will provide a better trading opportunity is one that is going through a period of congestion within an underlying trend.  This congestion period can be anywhere from one to five days in length.  Typically, when the stock breaks out of this congestion, it tends to explode in the direction of its underlying trend.

Once you have identified a solid list of potential stocks as day trading opportunities, you are ready for the trading day.  Then, it is just a matter of letting the trades unfold for you.  Trading the right stocks will help you gain much greater profits in the long run.

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