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January 12, 2005 What make a stock suitable for day trading?
Every stock must have some basic characteristics or factors that make it suitable for day trading; the following characteristics are the most important:
• Liquidity
• Spread
• Volatility
First, liquidity is necessary because you want to enter and exit a trade quickly. Liquidity also makes some pattern to be stronger, imagine a channel breakout that occurs; if the stock is not liquid then nobody will make the stock moving higher.
Also liquidity reduce the spread (difference between ask and bid), and this will help you reducing your slippage (difference between current price and executed price) when entering and exiting trades at market price.
If you want to trade 1 000$ for a particular stock then it is better that the stock' volume is higher than 100 000$ daily to make sure that you will get the best execution (Small slippage).
Volatility (actual or expected price movement of a stock) is another important factor for day traders and probably more important for scalpers. When day trading, you want big but quick profits and you probably know that the more volatile the stock, the more it can move quickly.
All theses factors are available as filters in Trade-Ideas and they are necessary to catch only stocks that are suitable for day trading. I use theses filters in my own Trade-Ideas settings:
Daily volume > 10 000 000$
Spread < 20 cents
Volatility > 0.4%
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