How to Pick Stocks for Day Trading: 9 Simple Rules to Follow

Day trading is notoriously risky, irrespective of the market. This risk is amplified in the stock exchange market due to high volatility. In fact, studies have shown that 64% of day traders lose money. If you want to be among the 36% that are profitable, you need to know how to pick the best stocks.

In this detailed guide, we’ll show you how to pick stocks for day trading. Follow these 9 expert rules if you want to maximize your chances of success as a day trader.

1. Focus On Highly Liquid Stocks

When choosing the right stock to day trade, concentrate on assets with high liquidity. That way you’re more likely to profit from their price changes.

The biggest indicator of stock liquidity is bid-ask spread. The narrower the spread, the higher the liquidity, and the more your potential profits when you exit your position. Highly liquid stocks often have a bid-ask spread of 0.5% or less of the share price.

In the example below, Planet Lab’s bid and ask prices are $34.66 and $34.79, respectively. The difference between the two is $0.13, which is only 0.37% of the share price ($34.67), indicating high liquidity.

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2. Search For Volatility

Although trading volatile assets is risky, you need to pick stocks with high volatility if you want to profit from day trading. A stock can be considered volatile if it experiences significant intraday price fluctuations.

You can quantify intraday volatility by finding the percentage change in price. Most traders look for stocks with 3% to 5% daily change. If you’d like to take a more technical approach, here are common volatility metrics for day traders:

• Beta: Measures a security's volatility relative to the broader market. A beta of 1.0 means the stock moves in line with the market. Greater than 1.0 indicates the stock is more volatile than the market.
• Standard Deviation: Measures the dispersion of a stock's price from its mean (average) over a specific time period. Calculated using a specific formula.
• Bollinger Bands: Uses standard deviation to show how much a stock’s price is moving around its recent average.
• Maximum Drawdown: a measure of the largest percentage drop from a peak to a trough in a specific period.

Use market scanners or screeners to identify such stocks with ease. Some of the best options for finding highly volatile stocks are Finviz Stock Screener and Blackbox. 

Trading volatile stocks without understanding what factors influence their price swings is basically gambling. Take time to understand the impact of news events, reports, and market sentiment on the stock’s share prices before execution.

3. Consider Current and Relative Volume

To reduce slippage and ensure your trades finalize at the preferred price, you should focus on high-volume stocks. Trading volume tells you the amount of shares bought and sold every day and is a clear indicator of interest.

However, don’t ignore relative trading volume, an indicator that compares an asset's current volume to its average volume over a specific past period. You can find this information using  charting software and scanners.

Focus on stocks with volumes of over a million shares per day and a relative volume of 2X or more.

4. Follow News and Market Sentiments

A catalyst is a notable event or announcement that significantly changes the price trend of a stock. By reading company news or reports and monitoring market sentiments, you can identify how these catalysts are affecting the stock market and leverage this information for profit.

Common news catalysts include regulatory changes, mergers, and acquisitions. For example, on April 1, Eli Lilly’s shares jumped by nearly 6% after an announcement that its weight-loss pill, Foundayo, received FDA-approval.

You need to stay updated on current events to take advantage of these catalysts. You should also understand market sentiment to ensure that your trade aligns with the price surge or dip. Leverage news websites, aggregators, sector-related podcasts, social media accounts, and customized alerts.

5. Remember to Implement Your Strategy

Every day trader must develop a strategy or plan that determines what, when, and how they trade. Popular strategies include scalping, breakout trading, and momentum trading. You should never buy a stock that doesn’t align with your strategy, even if it has high liquidity, volatility, and volume.

When developing a strategy, remember to include entry and exit points, set stop-loss orders, and create individual stock vs. Exchange Traded Fund (ETF) criteria. Setting a stop-loss order is extremely important for risk management and loss prevention.

For instance, a prop trader may use a breakout strategy and only buy a stock if it rises above a key price level with strong volume. They decide in advance where to enter, where to take profit, and where to place a stop-loss. They also skip any stock or ETF that does not match those rules.

6. Use Technical Analysis

The best day traders have mastered ways to interpret technical indicators. If you’re a beginner, this may take a while for you to learn. However, we urge you to watch this tutorial on the topic.

You may have to combine several indicators to pick good stocks for day trading. Here are some valuable trading indicators:

• Average True Range (ATR): This is the average range of an asset's price movement over a specific period. It is used as a measure of market volatility. Day traders use ATR to set stop-losses and define profit targets.
• Moving Averages: They identify trend direction and potential reversals. Day traders commonly use 5, 8, 13, 21, or 50-period MAs for short-term trends. Prices above the moving average may indicate an upward trend and prices below may signal a further price drop.
• Relative Strength Index (RSI): This measures speed and magnitude of price changes, helping identify overbought or oversold conditions. It scales from 0 to 100. Above 70 typically signals overbought conditions, and below 30 signals oversold conditions.

There are many more helpful indicators. Set adequate time to learn what they mean, their use cases, and how to calculate them.

7. Consider Stock Float

Find out the float of a stock before making a decision on it. A stock float is the number of shares available to trade on the public market. It excludes restricted shares and shares owned by company insiders.

For day trading, you want to focus on low-float stocks (fewer than 10 million shares) because their low supply makes them more volatile. Again, screeners like Finviz are extremely useful in identifying these stocks.

You’ll need that volatility to make quick profits. In 2021, GameStop experienced dramatic price swings due to limited share availability. At one point, its stock price doubled within a 90-minute period. 

8. Avoid Overnight Holding

Always remember to close all positions before the trading day ends. When faced with the decision, you may be tempted to hold positions overnight for more potential gains, but try to remain disciplined.

Overnight holding comes with its own set of risks, such as increased volatility, slippage, and large spreads. 

9. Capitalize On Directional Momentum

Momentum is a major driver in the day trading market and you should take advantage of both upward and downward versions. During periods of sustained upward movement, you want to be mindful of pullbacks and how they affect your stocks or ETFs. The weakest assets may experience sharper declines than others when the market pulls back.

A similar principle applies to stocks undergoing a downward trend. In such cases, assets that have dropped faster than the market often experience smaller price recoveries than others.

Bottom Line

Picking the right stocks for day trading requires an understanding of liquidity, trading volume, volatility, impact of news catalysts, technical indicators, and current market trends. To mitigate risks, it's vital to have a strategy that identifies your entry and exit points.

You can also avoid risking your own money by working with a prop firm. AtlasFunded offers up to $400K in capital for stock day traders.

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Ready to take the next step? Explore AtlasFunded's prop trading programs today and put your trading skills to work with the capital to match.

Cian Hansard

Senior Risk Manager at Atlas Funded

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Cian Hansard is Senior Risk Manager at Atlas Funded and has been trading for five years. He sets and reviews the risk parameters on Atlas evaluation and funded accounts, which means he spends his days looking at why accounts actually breach rather than why they were supposed to. He writes about prop firm rules, drawdown mechanics and payout terms from that side of the desk.