DECIDING WHAT & WHEN TO BUY

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What to Buy
Day traders try to make money by exploiting minute price movements in individual assets (stocks, currencies, futures, and options). They usually leverage large amounts of capital to do so. In deciding what to buy—a stock, say—a typical day trader looks for three things.

1. Liquidity. A security that's liquid allows you to buy and sell it easily, and, hopefully, at a good price. Liquidity is an advantage with tight spreads, or the difference between the bid and ask price of a stock, and for low slippage, or the difference between the expected price of a trade and the actual price.
2. Volatility. This is a measure of the daily price range—the range in which a day trader operates. More volatility means greater potential for profit or loss.

Trading volume. This is a measure of the number of times a stock is bought and sold in a given time period. It's commonly known as the average daily trading volume. A high degree of volume indicates a lot of interest in a stock. An increase in a stock's volume is often a harbinger of a price jump, either up or down.

When to Buy

Once you know the stocks (or other assets) you want to trade, you need to identify entry points for your trades. Tools that can help you do this include:

• Real-time news services: News moves stocks, so it's important to subscribe to services that alert you when potentially market-moving news breaks.
• ECN/Level 2 quotes: ECNs, or electronic communication networks, are computer-based systems that display the best available bid and ask quotes from multiple market participants and then automatically match and execute orders. Level 2 is a subscription-based service that provides real-time access to the Nasdaq order book. The Nasdaq order book has price quotes from market makers in every Nasdaq-listed and OTC Bulletin Board security.4 Together, they can give you a sense of orders executed in real time.
• Intraday candlestick charts: Candlesticks provide a raw analysis of price action. More on these later.

Define and write down the specific conditions in which you'll enter a position. For instance, buy during uptrend isn't specific enough. Instead, try something more specific and testable: buy when price breaks above the upper trendline of a triangle pattern, where the triangle is preceded by an uptrend (at least one higher swing high and higher swing low before the triangle formed) on the two-minute chart in the first two hours of the trading day.