Day Trading Skills - Appraising A Stock For Trading

Despite the dire caveats by the Securities and Exchange Commission cautioning investors against the controversial yet potentially lucrative world of day trading, people continue to try and attain day trading skills, and a day trading stock tip is literally worth it's weight in either gold, or dross! Below is some information on learning trading techniques, the risk involved, and techniques for becoming a successful trader.

Just what is day trading and how do investors gain day trading skill? Day trading is the act of speedily buying and selling stock throughout the day to profit from the tiny oscillations in the market for that given day. Ideally, day trading strategies let investors reap profits from the tiny increases in the market.

Day traders watch a particular set of indicators when deciding whether a stock is suitable for day trading. First, the stock has to have high liquidity. This means that the stock in question has a large number of buyers and sellers. The liquidity allows day traders to speedily purchase and then sell stock. Liquidity is based on 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 watches volume individually, in addition to using it as standard for liquidity. To be eligible for day trading, a stock must trade at least 500,000 shares each day. Stocks with 500,000 trades a day or more enable the day trader to buy or sell a large amount of stock without greatly affecting the price of the stock. Volatility is another factor in assessing a stock for day trading. The term refers to the actual or expected price movement of the stock. This movement is up or down over a period of time. Day traders watch the pattern and volatility of stocks over an individual day. Stocks that change price frequently over one trading day are perfect contenders for day trading. A fluctuation of at least $2.00 per day is recommended.

Finally, a day trader evaluates the price transparency of stock. This term relates to the ability to collect information on the order flow of a stock. Also called market depth, price transparency helps the day trader calculate 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 are able to access the NASDAQ level II quote screens can evaluate the performance of a stock and determine its swing in price.

While these trading strategies are totally legal and completely ethical, they are extremely risky. Day traders generally buy on borrowed money with the hope that they will procure higher profits through their acquisitions and sales. People who are deemed "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 additional 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 related risks.

The first few months, a vast majority of day traders endure massive financial losses and only a few make it through to become profit-making day traders. For this reason, day traders should only invest funds that they can afford to lose. They should never invest money reserved for the essentials such as living expenses or retirement accounts.

Keep in mind that day traders do not own stocks for longer than a few minutes at most. Stocks are never kept overnight because of extreme risks of prices changing to the detriment of the trader. Day traders do not invest, rather, they theorize on the movement in price of a stock throughout the day.

There are lots of websites whose sole purpose is to make their living from those who seek a day trading stock tip. These websites assure speedy results and suggest hot tips to their members for a fee. The sources are most often paid to make these recommendations and should be avoided. Enlist the advice of a proven professional, and take plenty of time to discover trading strategies for longer term success. Remember, there is no free money, and day trading skill is often paid for with debilitating stress and cataclysmic losses.
For a wealth of free info on understanding stock trading, check out the articles at Stock Trading Information Resource, or make sure to read The Wall Street Journal - my #1 pick for stock information. Ron King is a web developer; visit his website Authoring Articles.

Copyright 2008 Ron King. This article may be reprinted if the resource box is left intact and the links live.