Strategies for Selecting Stocks in Day Trading vs Long-Term Investing
When it comes to day trading, there are specific criteria and strategies that traders look for in stock selection. On the other hand, long-term investors have their own set of criteria and approaches. Both methods have their own merits and challenges.
Day Trading: Specific Criteria and Strategies
For day trading, selecting the right stocks involves a combination of technical analysis and market volume. Many day traders, like the one we will discuss, prefer to trade in stocks that are under a certain price range, usually between under $12 to $15. This is because these stocks are more flexible for rapid transactions. Additionally, these stocks need to be well-known brands with high trading volume to ensure they can handle large trades without significant price impact.
Technical indicators such as Simple Moving Averages (SMAs) are crucial. The trader mentioned commonly uses the 20, 50, and 200-day SMA lines to assess the trend and smoothness of the stock's chart. For instance, the stock AUY may exhibit more bounciness, while MRO shows a smoother flow. It can be beneficial to analyze the stock on both one-minute and two-minute charts to get a better understanding of its predictability.
The trader also mentioned holding MRO for more than 13 months, indicating that a familiar and steady trend can be advantageous for day trading. As the old saying goes, "If it ain't broke, don't fix it."
Long-Term Investing: Criteria and Approach
In contrast, long-term investors generally do not focus primarily on the day-to-day fluctuations of the stock market. Instead, they look at broader criteria such as the balance sheet, dividend yield, and the historical stock performance. The investor’s goal is to buy stocks that meet their criteria and hold them for a long period, ideally until they are ready for retirement.
While not personally a day trader, the investor has observed that some day traders use cryptocurrencies like Doge Coin as a trading vehicle, finding it very predictable. However, they themselves do not have direct experience with day trading, highlighting the complexity and high risk associated with this strategy.
Basic Criteria for Stock Selection
Regardless of the trading approach, there are some basic criteria that can help in stock selection:
Volume Percentage and Premarket Volume: Higher volume can indicate more liquidity and lower volatility. Average Daily Volume: Stocks with higher average daily volume are typically more liquid and less likely to get affected by large trades. Stock Gaps: Traders often look at whether a stock is gapped up or down, as this can affect the price movement within a day. Candlestick Patterns: Certain candlestick formations can indicate strong buy or sell signals, helping in decision-making based on the daily chart.Additionally, incorporating momentum indicators can also be beneficial. These help in identifying stocks that are breaking out and maintaining momentum above the previous day's high or low, signaling a potential trend continuation.
Day Trading Example: Yesterday's Movers
A day trading example involves looking for stocks that have experienced a breakout and maintained momentum. For instance, if a stock moved above its yesterday's high on the 3-minute timeframe, it could be considered a strong buy signal. Traders should be quick to exit the trade if the stock moves more than 2R (2 times the average range) against their position. Initially, day trading positions should be small, perhaps 500-1000 shares, and then scaled up as the market stabilizes by around 10 AM.
Traders who are disciplined and can make quick decisions can profit from such strategies, but it also requires a deep understanding of the market and a clear set of rules to follow.
In conclusion, whether you are a day trader or a long-term investor, having a clear and cautious approach to stock selection is fundamental. Each approach comes with its own set of challenges and rewards, and understanding these can help investors make more informed decisions.