Most large and mid-cap stocks will usually only move a few percentage points each day, so day traders try to identify the most volatile of these stocks and often use leverage to maximise the potential profits (but also the losses) they can make. Some day traders choose to deal in one or two stocks for weeks on end while others trade different stocks each day depending on the bigger picture: such as those that are releasing news updates or earnings, or ones that are likely to be affected by political or economical events.
Either way, all day traders want to deal in stocks that offer the same characteristics: volume, volatility, liquidity and range – all of which are needed to make a great day trading stock.
Read more about how to trade stocks
Volume and liquidity
Volume and liquidity are both key to day traders, but often regarded as the same thing. Volumes represent the number of executed trades that have been completed while liquidity represents the activity in the order book, with the most liquid stocks often having order books filled with orders at a variety of buy and sell prices. If a stock has high volumes then it means a day trader has a better opportunity to enter and exit positions as there are lots of others willing to buy or sell. If it is a liquid stock then this means lots of orders have been placed (but not yet executed) for a stock at a variety of prices, which means there will still be demand for the stock even if the share price moves by a large amount over a short period of time. This is why both are critical.
The concept that volume and liquidity are intertwined is misunderstood. Low trading volumes but high liquidity suggests there is low demand for the stock at its current price but a lot of people lining up to buy or sell if the price moves in the future, while high volumes and low liquidity suggests there is a lot of appetite for the stock at its current price but few orders in place at higher or lower prices.
Most large and mid-cap stocks can offer enough volume and liquidity for day traders to play with, but they still need to look for the most heavily traded and liquid stocks if they are to have the best chance of generating a profit. Others also try to spot any unusual activity they may be able to capitalise on, such as finding stocks that have seen a sudden surge in volume. The best way to find stocks with adequate volume and liquidity is to use a stock screener that tracks the most traded stocks each day.
