Can I make a living day trading? I get this question everyday. Good question, most people probably could not. Day trading is about gathering information and making a decision on which direction a particular stock will move. To make a living day trading you need to have a good concept of what kind of news moves the markets and individual stocks. You need to watch the financial news. You also need to be aware of what is happening around the world. Not only does the economic news in the U.S, affect our stock market movements so does the economic news coming out of the rest of the world. The world is linked and we are a global economy.
Day Trading Fundamentals
To trade individual stocks one of the main things to keep in mind is the direction that the market is trending. Stocks follow the general trend of the market. In a down trending market as we are in now, many times when a stock releases news that’s considered positive, the stock price will open higher and sell off as the market goes down. Other things to look at when you think that you have found a stock to trade is the PE, the float, the percentage of the float that’s been shorted and volume traded per day. If any of this sounds foreign to you, you should not be thinking about day trading.
- The PE is the price to earnings ratio of a company. The higher the PE, the greater the earnings expected from the company. The long-term average PE is about 16, so the higher the pe usually means the more expensive the stock price. Investors are willing to pay a higher price for higher growth. I check this so I know if I’m looking at an expensive stock or not. The more expensive the stock is, usually the more it will fall on bad news.
- The float is the available number of shares to the retail investor (you and me) for trading. The lower number of shares in the float the more unpredictable the price movement of the stock. I like to find stocks with low floats to trade on good news. I consider a low float stock 7 million or less available shares, less is better. The movements can be huge 200-400 percent in a matter of days. Keep in mind they can come down just as quickly nothing goes up forever. I tend to stay away if it’s a low float stock on bad news.
- I always check how much of a stock has been shorted. The higher the percentage shorted can result in big moves. A short squeeze happens when good news is released and demand increases volume. As investors come in to purchase the stock the price goes up. The higher the price goes shorts have to decide if they can risk staying short. If not they have to buy back at the higher prices to cover their shorts adding to the demand causing prices to further escalate. Short squeezes happen more often in companies with a small public float.
- Volume is something that you need to check if you want to day trade stocks. You need to have enough volume or liquidity to be able to get in and out of the stock that you want to trade. You also need to understand what a volume spike means. You can have volume spikes on good news, bad news, analyst’s upgrades and downgrades. Understand the news and its impact.
You also need to have an idea of what your risk tolerance is. You do not want to go into a trade with all you have and then have it go against you, scare you out with a loss and then watch it do exactly what you thought it would. Take an initial position and wait to see if it reacts the way you anticipated, if so then you can increase your position and keep an eye on the direction that the market is moving. Remember do not be greedy if you have a decent profit take it.
Day trading is all about understanding how the market works and what moves it. Much of the time your biggest movement comes in that first and last hour of the trading day. In a down trending market, you want to sell into strength and buy on weakness. If you have never day traded before, try paper trading before beginning to see how your strategies work!
Written by Becky Smith
Becky Smith is professional day trader. In 2007 She entered stock trading contest by The Street. Com. She competed against 26,000 participants and beat them all. For her efforts Becky was awarded a check for $150,000.00. She has agreed to share some of her knowledge to the readers of the Financial Zone
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