Day Trading Skills - Assessing A Stock For Trading

By: Ron King
Despite the dire warnings by the Securities and Exchange Commission cautioning investors against the controversial yet potentially lucrative world of day trading, people want to try and acquire day trading skills, and a day trading stock tip is literally worth it's weight in either gold, or dross! The following is some information on learning trading techniques, the risk inherent in the system, and strategies for becoming a proficient trader.

Just what is day trading and how do investors gain day trading skill? Day trading is the system of speedily buying and selling stock throughout the day in order profit from the marginal changes in the market for that particular day. In the ideal world, day trading strategies let investors garner profits from the tiny increases in the market.

Day traders look at a specific set of indicators when deciding whether a stock is suited for day trading. First, the stock should have high liquidity. This means that the stock in question has a large number of buyers and sellers. The liquidity enables day traders to quickly acquire and then sell stock. Liquidity is determined by the volume of transactions on the market, the number of outstanding shares, the total number of shareholders and the number of market makers.

Almost all stocks on the NYSE and NASDAQ have a high degree of liquidity.

A day trader also studies volume individually, in addition to using it as criteria for liquidity. To be eligible for day trading, a stock should trade at least 500,000 shares a day. Stocks with 500,000 trades a day or more will allow the day trader to purchase or sell a large amount of stock without greatly changing the price of the stock. Volatility is another issue in assessing a stock for day trading. The phrase refers to the actual or expected price movement of the stock. This movement is up or down over a period of time. Day traders study the pattern and volatility of stocks over an individual day. Stocks that change price several times over one trading day are ideal candidates for day trading. A fluctuation of at least $2.00 per day is recommended.

Finally, a day trader looks at the price transparency of stock. This term pertains to the ability to collect information on the order flow of a stock. Also called market depth, price transparency helps the day trader figure out just how much money there is to be made on a certain stock. The NASDAQ II quote system offers information on all bids. Day traders who arrange to access the NASDAQ level II quote screens can survey the performance of a stock and ascertain its swing in price.

While these trading strategies are completely legal and entirely ethical, they are extremely risky. Day traders usually buy on borrowed money with the hope that they will obtain higher profits through their acquisitions and sales. People who are determined to be "pattern day traders" by the NASDAQ and NYSE must have at least $25,000 in their accounts and can only trade in margin accounts. Margin accounts are brokerage accounts in which the broker lends the investor cash to purchase securities. If the value of the stock drops a great deal, the investor is required to deposit more cash to cover the margin or sell the stock. The SEC discourages day trading and acting on a day trading stock tip, and has taken many steps to inform people of the corresponding risks.

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