Entrepreneur
If you don’t have a thorough understanding of what professional day traders actually do, then you most likely think day traders are kids with more money than brains.
The composite image of day traders is not flattering when it’s composed of things like this:
- Someone took his life savings to invest in a meme stock to “teach Wall Street a lesson” — and lost it all.
- The guy who brags that he trades on his phone while stopped at a red light.
- Gamers with a can of RedBull in one hand and a mouse in the other and get their trading tips from Reddit threads.
I’m here to tell you that there exists a type of day trader who is highly disciplined and thoroughly trained. These people are more like the “quants” that Wall Street firms hire to make sense of vast amounts of data. Far from being a gambler, this type of day trader is a hunter of volatility and a manager of risk.
Among professional day traders, there are different investing styles to match different risk tolerances. Therefore, I’ll give you my take on five characteristics that make up a strong stock from a day trading point of view.
Related: How I Turned $583 into $10 Million by Day Trading
1. A stock that’s moving now
Imagine someone who graduated from business school and maybe even got an advanced degree in accounting. Oh, and this person also interned at Goldman. They are great at deciphering income statements and balance sheets.
Now, let’s imagine they’ve identified an “under the radar” stock that exhibits powerful signals for being significantly undervalued.
As a day trader, I have little interest in this stock. Why? Because it currently is not moving out of its narrow daily band. It’s not good enough for a stock to be “significantly undervalued” or “poised to move.” I don’t want to wait around hoping that a stock moves. As a hunter of volatility, I am only interested in stocks that are moving right now.
You may think that this approach does not maximize potential profits. After all, the stock has already moved by the time I’m looking at it. It’s true that by waiting until a stock moves, I’m foregoing some profit. But I’ve traded that profit for something far more valuable — the certainty that the stock is one of the biggest movers right now. I’d rather have actual movement versus the theoretical potential of movement.
Related: Learn How to Earn Passive Income Through Day Trading and Investments
2. FOMO
I try my best not to trade with the fear of missing out (FOMO). I instead recognize FOMO as a powerful, primal force on many traders, and I use that knowledge when I take my trades.
Long-term investors may be satisfied with stocks that grow by single digits in a year. Yet, on any given day, some stocks can move up 50% in minutes. Sometimes, the moves can be in the triple digits.
When day traders see a stock that has made such a move, they know that someone, somewhere, just did very well with a short-term trade. These stocks have a powerful mental effect on traders. I look for stocks where FOMO has become a strong signal. The attention these stocks receive may allow me to make some short-term trades.
This means rather than falling victim to FOMO, I capitalize on FOMO that exists in the market.
3. Stocks that are the subject of greed and regret
Yesterday’s epic mover activates the greed glands of many traders the next morning. They say to themselves: “I can’t believe I missed that whole runup!” And they swear that today will be different.
Not only can that emotion mean that yesterday’s hot stocks still retain some heat, but they can infect other stocks in their wake. It’s as though the pent-up desire to participate in yesterday’s headliners is casting about to find the next big mover.
It also can happen out of the blue: When one stock is unusually strong, several others often start to pick up for no apparent reason — other than what I call “sympathy momentum.” I’m on the lookout for this behavior.
Related: 4 Passive Income Investment Strategies That’ll Free Your Time and Peace of Mind
4. An imbalance between supply and demand
The term “float” refers to how many shares of a stock are available to trade on any given day. It’s not uncommon for a handful of stocks to have a few million shares of float. If they become the hot stocks of the day, those stocks can trade in the hundreds of millions of shares.
Just think about what that means: how many times does a stock with a 5-million-share float need to change hands when it trades 350 million shares in a day? As a “hunter of volatility,” I pay particular attention to such stocks.
5. Former-runner status
Day traders have good memories for high flyers. It’s like brand recognition or an afterglow for the stock that was the subject of so much attention in the last trading session. I keep an eye on these former runners because if they take off again, it can happen especially fast.
In summary
Notice how these five stock characteristics have nothing to do with earnings estimates, revenue forecasts, management shake-ups, and other common Wall Street assessments of a stock’s likelihood to move. Even so, they have everything to do with what’s in the minds of other traders as they hover over the buy and sell buttons on their keyboards.
Profiting from short-term fluctuations in price is what day trading is all about. Day traders must be masters of technical analysis and experts at assessing the current emotions among traders. After all, it’s not just the stock chart that is important; it’s how traders feel about a stock that will ultimately drive its price action. If you understand and act on these common forces at work during any given trading session, you have the potential to come home with something to show for your hunting trip.
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