With over 6500 issuance’s, finding the right stock(s) to trade can be a daunting task. The problem is also compounded with everyone and their mother giving you advise on what you should be buying or selling. I’m not just referring to the nonsense you hear on CNBC. I’m referring to every online bulletin board, blog, website and gimmick to get rich quick. When it comes to trading, not investing, there a set amount of characteristics that you are looking for in a stock depending on your overall trading strategy. We will look at different strategies in due time. All of which will centralize around an important concept, knowing when the major player are in the market so that you can trade with them instead of against them.
For now we will concentrate on two styles of trading:
Day Trading (also referred to a short swing, where you’re flat by every close)
Swing Trading (hold a position overnight in effort to capture broader moves)
Which is the best stock trading style? It totally depends on the individual, trial and error, and experience among other things. We will start by looking at stocks for day trading.
When day trading, volatility if your friend. You need volatility. For those of you that don’t know what volatility is, you are not ready to begin trading, but I’ll explain it to you. Volatility is simply the distance that the stock moves during the day. Specifically you need a stock that has a large degree of distance in order to capture enough of the move to be profitable. The best way to find these stocks is to look at their average 20 day range as established by the average distance from the High subtracted by the low of the day. I would highly recommend that you do not choose to many stocks to watch at any given time especially prefer starting out. This is because is it’s always easier to watch a few things that a lot of things. However volatility is a double-edged sword. The reason being is because too much volatility limits your ability to manage risk even though allows you to capture tremendous upside. The other potential issue is that some of the most volatile stocks are also very illiquid which means that the cost of entering and exiting a position can be quite large. As developing trader you want to keep your costs down as much as possible.
Probably the best place to start is a set of trading individual stocks is to trade some of the double leveraged and triple leveraged ETF’s. In fact, many people make their entire living by only trading ETF’s. A nice feature about them is that they move enough during the day to allow you to take a small enough size initially so that you be comfortable with the market without risking a lot of capital. In addition they are usually very liquid. Some of the ones to check out include BGU, BGZ, TNA, TZA, FAS, FAZ, ERZ and ERY. TStudy their charts and see how they move. Make sure that you do not ever hold these overnight as they are not designed to be held overnight they are only designed to be traded during the day. For some people, the best stock trading comes from not trading stocks at all but from trading these exchange traded funds.
The next group of stocks that we will look at are those that are best suited for swing trading. Generally speaking, the stock that you will be swing trading do not have as high of volatility as those that you would prefer to day trade. This is good in a way because allows you the opportunity to worry a lot less about your position. However for those people who are generally very impatient, these may be much too boring for you trade. The stocks that best fit this criteria are those that tend to trade in arrange over multi-day period and that are usually closing underneath their lower Bollinger band on a daily timeframe. This is not the only way of finding these type of stocks. It is only one example of many that would be suited for this style trading. Sometimes large-cap stocks fit this criteria pretty well because they generally do not trend heavily day after day. Instead, they only trend within a multi-day range.
Again, some of the ETFs may be better suited for swing trading symbol because there was less for you to go looking for and they allow you to trade the overall bullish or bearish sentiment that’s currently dominating the broad market. For a newer trader this is usually also the best way to start. However, you would want to be absolutely sure that you are not using the leverage ETFs when swing trading. Some ETFs that would fit this criteria pretty well include USO, SPY, XLF, XLE, XLS etc.
Why am I focusing so heavily on ETFs? Quite simply because I believe they really can offer the best of both worlds, high volatility if needed or low volatility if you wish, yet both allow for a minimal amount of things to watch during the day. Yes, you probably have heard about people making enormous returns in some specific stock. Those returns are generally not indicative of successful traders who grind in out all day long. Furthermore, the best stock trading comes from being able to trade successfully in general regardless of what type of stock you’re actually trading and regardless of its volatility. Being successful at trading overall allows you to trade any market you should desire in the future. Trying to get rich quick with out doing the leg work will end is disaster.
In an upcoming post we will take a look at how, where, when, and why you place a trade.