How To Pick Stocks For Stock Trading

I have found that the best stocks for stock trading and day trading are the stocks that make up the S&P 500. The reason for this is that the large Mutual Funds and large Institutional Buyers concentrate on these stocks in their never ending quest to beat the S&P 500. These stocks generally have strong relative strength and absolute performance to the S&P 500 Index. Of these stocks, I like to concentrate on those that are in the Nasdaq 100 Composite Index. It is the Nasdaq stocks that I like to trade the most because of their volatility of the stocks in the Nasdaq 100, I concentrate on those stocks that I that I like to refer to as “trading where the action is” stocks. These are stocks that show tremendous volume in the number of shares being traded during the day, at least 15 million shares and preferably 20 million shares and more. My real preference is share volume of 30 million plus per day.

In addition, the stocks must have a large daily stock trading range, which is the difference between the high price and low price of that stock for the previous trading day, and a lot of volatility. I look for a trading range of at least $2.00 per share, but I really prefer those that are more volatile and have a daily travelling range of $3.00 to $6.00 and more.

The reason for this is that I trade both sides of the market, both the long side and the short side on an intra-day basis. I have no interest in whether the stock closed in positive, or negative territory the previous day, just as long as the volume and price action are there.

All I want is the price action, high volume and the volatility. If I have these three ingredients, I know that the major players are very active in that stock and they are either increasing, or decreasing their weighting in that stock. Adding to and contributing to the price and volume action are what I call the “accelerators”, which are the momentum players, the program traders and the hedge funds who are trying to jump in ahead of the mutual funds and front run the stock, either up, or down. This is when the action really heats up and you will see “climatic volume” where each stock trade is occurring in less than a second. I have seen this many times every day. It happens all of the time.

One thing that may not be apparent to you on the surface is that what I have done when I pick stocks for stock trading is that I have used the major players as my research department. The money flow is very visible because most institutions are on the same page in terms of what they are buying and selling. This shows up in the price action, the volatility, and volume for the stocks in play. It is awfully hard for a herd of elephants to hide their foot prints in the sand.

Now with a potential list of stocks to trade. I then load those stocks into my “stock trading” watch list . In addition to that watch list I have another watch list that contains every stock in the Nasdaq 100. When the market opens I spend the first 5 minutes or so, observing the volume, price action, and direction of the stocks in both watch lists.

I am looking for certain patterns to develop and if I see a pattern that I like to day trade, I will pull the trigger and take the trade, either on the long side or the short side based on what the stock (price action and volume) tell me, what I see the market makers doing on the Level II screen, and provided the stock is trading in line with the chart of the Nasdaq 100.

I always have a fairly tight protective stop in place to protect me in case I am wrong and took the trade too soon. I may attempt that trade 2 or 3 times before I get the right entry, each time taking a small lose. But when I get the right entry, there is a lot of money to be made, especially when you are in the right stock.

One of the things I like to do is to stay with the same stock, as long as it satisfies my stock trading requirements. I may trade the same stock all week as along as it is performing for me and I am making good profitable trades with it. One of the benefits in doing this is that you really get to know the stock well, and how it trades.

To recap, in my opinion the best stocks for stock trading are those stocks with very high velocity and high volume, high volatility and a good intra-day travelling range. When you have these characteristics, you know the large institutions and the “accelerators” are involved in the stock.

For stock trading, you will need a direct access day trading account from a stock trading broker that offers direct access stock trading software. This is an absolute must have for day trading. The software will have Level II, charts, technical indicators, etc. Direct access means that your buy and sell orders are sent directly to the market by you without using a middle man to place the orders for you..

The first thing you need to do before you even attempt stock trading, and this is even if you do have some experience, is to take a good day trading course so that you really understand how the business of stock trading works, what patterns to look for, how the markets work and how everything fits together. It will be the best investment you ever make. If you don’t eductae yourself – you have better than a 90% chance of failing.

* the words stock trading and day trading are interchangeable.

Good luck and good trading,

The Maverick
Larry Schade