- 1). Develop an entry strategy. The best stocks for day trading are highly liquid and volatile. Liquidity (tight spreads) provides traders with the ability to enter and exit at exact price points. Volatility is a measure of the daily price range; high volatility means greater profit or loss.
- 2). Identify the stocks you want to trade. The best tools for this are intraday charts, Level II quotes (real-time pricing feed), and a real-time news service.
- 3). Identify patterns in stock charts. Focus on reversal patterns, trend lines, and the volume of stock traded.
- 4). Look for volume spikes. This signifies support at that price level. Look for previous support at these levels.
- 5). Use Level II data to look up the open orders (number) and the order sizes (amount). This is the main advantage of Level II quote screens.
- 6). Identify a price target. Two strategies used are scalping and fading. Scalping is selling immediately after a trade becomes profitable. The target is just after profitability is reached. Fading is shorting (selling) a stock after a rapid move upward. The strategy counts on overbuying and earlier buyers taking profits.
- 7). Determine a stop loss. A stop loss is a worst-case scenario price to set your losses at. This is an automatic order to unwind (get out of) your position. You can set up a physical or mental stop loss, but they are necessary for any good trader. Think of them like a lifeboat.
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