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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.
- 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.
- 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.
