So you have decided to embark on a journey of day trading, but maybe you’re struggling to get your head around the various terms, types of trades, and advice.
It’s a lot to take in, and there are a lot of people you “can” listen to…
You’ve been doing your reading, following the best experts on YouTube, you’re constantly doing your research, but you are still unsure which stocks to choose. Don’t worry!
In today’s article, I’ll walk you through the criteria you need when choosing a stock.
But before we do, you may want to consider reading my Investing for Beginners series. I’ve been posting this series for a while now and it contains a ton of information that you’ve probably missed out on (and definitely need). It has been created for beginners to give you day trading tips and insights into how I started and how you can make it big.
With that in mind, let’s jump straight into talking about how to select the best stocks, AND why it’s so important to be careful about the stocks you do choose.
Let me give you an analogy real quick…
Imagine you’re planning to make the ultimate dinner for your family. You’ve pulled out the best recipes and have created an amazing menu of items, plus you’ve sourced all the best ingredients. But if you don’t time your cooking process correctly, what will happen to your meal?
Your meal could end up being undercooked or burnt as opposed to yielding the amazing taste you expect to share with your loved ones. And this is the same that happens when the timing is off for when someone gets into a stock.
Most people fail at day trading not because of how risky it is, but because they don’t know how to time whether or not a stock will go up or down, based on the patterns that the stock indicates. Identifying patterns and utilizing eight strategies that have high probabilities of succeeding is something I teach to my students within the Freedom Challenge.
Reviewing the data of companies who have made their stocks public is a vital step when analyzing the quality of their stocks. Due diligence before you play with a stock will not only increase your chances of profits, but it also reduces risk to keep your losses to a minimum.
Because of the convenience of the internet, at least now investors are able to access real-time information about companies, their stocks, and the market. Having said that, because of this vast information available at the click of a button, choosing a stock is not so straightforward (and can be overwhelming).
If you are feeling the same way, read on.
Let’s check out some criteria I keep in mind while selecting the best day trading stocks…
The Criteria To Keep In Mind While Picking A Stock
I consider Penny Stocks to range between $1 to $10 per stock.
Normally I completely ignore stocks below $1, even though technically they are Penny Stocks. They get manipulated to stay around the dollar mark and also carry too much risk.
More often than not, I trade stocks between $3 and $10 (ideally between $5 to $10).
The reason why this particular price range is the sweet spot is something I explain in this video.
When you’re trying to come to a decision on whether you should purchase stocks of a certain company, you shouldn’t just look at the price but also the market cap.
Market cap, or capitalization, refers to the total value in dollars of a company’s outstanding shares. The number of available shares multiplied by the price per share gives us the market cap.
Market cap is an important indicator to look at. It tells us how much a company is worth. It allows traders to understand the relative size of a company in comparison to others. It’s an important figure to know when figuring whether to choose a stock or not.
The market cap number determines if a company falls under small-cap, mid-cap, or large-cap.
- Large-cap corporations are those with a market cap of $10 billion and above.
- Mid-cap companies are those with a cap between $2 and $10 billion.
- Small-cap companies are those with a market cap between $300 million and $2 billion.
In general, large-cap and mid-cap companies tend to grow slower than small-cap companies.
The price movements with mid-cap to large stocks typically are only 1-2% a day.
The higher the market cap, the harder it is for a stock to move and adjust, therefore it lowers the number of opportunities for day traders like you and me to reap a heavy profit.
If a stock has a market cap of, let’s say $3 billion, it’s difficult for it to move and perform well in terms of profits. The goal for you is to make profits due to price fluctuations and if the price doesn’t fluctuate as much, then there are fewer chances for profit.
As such, you can usually eliminate stocks with larger market caps like this from your priority list.
I recommend trading in small-cap markets because the rewards in comparison to risk are simply higher.
Float is the number of shares a company has made available to the public, effectively making these the number of shares that traders can actually trade.
This is an important number to note because it gives you an indication of how many shares you buy and sell.
Let’s say a company decides to authorize 200,000 shares to trade in the market, out of which 50,000 are held by employees and internal stakeholders.
The remaining 150,000 shares are referred to as the float.
When the float is high, it means there is a higher number of shares available in the market.
i.e. the supply of shares is high.
When the float is low, it indicates there are fewer shares available to trade.
If demand for a stock is low and the supply (float) is high, it’s usually an indicator that the price of a stock will go down. If the demand is less, then the stock really won’t budge from its price position. A high supply usually does lead to low demand as the stock isn’t as elusive.
A low supply of stocks leads to having a considerably small number available for trading and because of this they’re volatile.
Low float is generally said to be less than 15 million shares.
Anything above 15 million is considered a high float.
The latter will not see many price changes or opportunities.
It’s important to see a stock’s charts throughout the years, to see it’s full history. If you look closely and analytically, a stock’s old charts tell you everything you need to know about its future.
Historical data helps you make an informed decision on whether you should choose a stock or not. And this decision comes from logic arising out of history rather than emotion.
Most traders do not trade by looking at historical statistics. They go by their gut feeling, which essentially makes their trades like gambling, hence why 94% of day traders fail.
Trading with emotion is not sustainable and so it’s important to trade based on historical statistics.
I use significant historical data to replicate and predict results based on what happened in the past. Going back to study high volume days gives you the ability to be able to spot patterns.
That way I am able to predict how a stock will perform.
Some Tips To Select The Best Day Trading Stocks
When you’re in the process of selecting stocks and creating your portfolio, there are a few things you can keep in mind to set yourself up for success.
1: Stay Aware Of Latest News And Trends
A good way to stay updated about stocks that are volatile and carry opportunities is to track the news. Stocks can make huge movements within the day and watching/reading the news gives you a good idea of which to look out for.
A few ways to keep up with the stock market are:
- Podcasts – Make the best use of your time, even when you’re out and about, and listen to trading news podcasts. Many of them carry interviews, news updates, tips and tricks, and other important trading knowledge. They’re especially great as you can listen to them even while you’re commuting or doing household chores. Here are some of my recommendations.
- Google Alerts – The best thing about Google Alerts is that they’re free and easy to set up. If you want to track a particular product, company, or industry, you can turn on Google Alerts to get notifications on your email.
- YouTube – There are a few good YouTube channels out there providing day trading knowledge and news. Go through my YouTube channel where I’ve dedicated many videos toward day trading for beginners. I also share weekly analysis, introduce new strategies, and more tips and tricks. I also have recommendations here.
- Your Community – For my students in The Freedom Challenge, it’s not just a course but a thriving community of driven traders who help you stay updated on the most relevant and significant news. You should always look to join a private community where those around you direct you toward the “right” information.
2: Don’t Forget Risk Management
Remember to determine how much risk you are comfortable with. Proper risk management ensures you keep your losses to a minimum and don’t spiral out of control.
In my experience, keeping a limit of between a 7%-15% potential loss on your trade will give you room to trade more in a day and therefore choose wisely.
This rule denotes the maximum risk you can take on a single trade should never be more than 15% of your position in a stock or option.
In day trading, you can potentially make more than one trade, sometimes multiple trades every day, so it’s important to fix an upper limit on your risk through the form of a stop-limit order.
3: Do Not Let Your Emotions Get Involved
Day Trading is all about using analytical and historical analysis to come to conclusions about stock movements and patterns.
There is no room for emotions here so do not get attached to stocks or trades.
If a stock performs well for you, do not get complacent with it.
If it does not, do not get disheartened for future trades.
Stay focused on the information at hand and your strategies.
One of the most important ways to keep emotions at bay is to have a proper trading plan and to stick to it. Understanding how your own psychological makeup affects your trading is key.
You must let only logic and your plan steer you.
The Bottom Line…
Day Traders who have successfully (and consistently) found sustainable profits have practiced so much that their senses are now trained to spot the right stocks.
Follow the tips we just discussed, stay alert, and eventually you will get there too.
It takes patience but your investment will be worth it and lead to profits that grow exponentially over time. Once you have mastered the skill of choosing the best day trading stocks, you’ll have more confidence and higher win percentages.
If you would like guidance on how to select the best day trading stocks and how to make the most of them, don’t forget to check out the Freedom Challenge. It is not just a course I have built but a community of like-minded people who will help you thrive and make the best possible choices.
Students who work with me are some of the most driven people you’ll find in this industry, consistently making the right choices. They don’t believe in shortcuts. They put in the work.
Learning how to choose stocks is a constant journey of practice.
What’s important is that you know what you’re doing and not shooting in the dark.
That’s what motivated me to build this program and that’s what keeps me going.
To help YOU avoid wasting your time and finding the path to success quicker.
Along with my program, you may also find my Free Day Trading 101 Newsletter valuable.