How to find the best day trading stocks

What makes a stock great for day trading?

The ambition of day traders is to take a position on a stock that can deliver a return on the same day, so traders need to find heavily traded stocks that can experience notable price movements over short periods of time. As the Lloyds example shows below, the game is taking a position on a stock and being able to make a profit within just minutes or hours, or by the end of the same trading day at the latest.

Read more about a beginner's guide to day trading

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.

Volatility and range

Volatility and range are also key to day traders as they can define the amount of profit of loss a day trader can make. A stock needs to be volatile if a day trader is going to be able to profitably enter and exit a position in just minutes or hours, with share prices in some stocks tending to move by a much larger daily average than others.

For example, income stocks like utility companies tend to experience very small daily movements while mining or oil companies tend to experience more severe fluctuations because of outside drivers, like metal or oil prices. However, it is important to note that while the potential rewards on offer are higher with more volatile stocks it also heightens the potential losses on offer, so traders need to find a balance that suits their own appetite for risk.

Most large and mid-cap stocks tend to consistently trade between a high and a low over long periods of time, with the high providing price resistance and the low representing price support. The range can help identify stocks that could be about to break out into new levels or used to calculate the risk attached to each stock: one with a tighter range is likely to experience smaller daily price movements while a wider range suggests the price can experience larger price movements. Again, stock screeners can be used to find stocks that offer your desired range and find ones lingering around their highs or lows

Top UK stocks to watch for day trading

Below are lists of the 10 most traded large, mid and small-cap stocks in the UK and US as of 17 May 2019:

UK day trading stocks: most traded

US day trading stocks: most traded

5 Tips for day trading stocks

Find 5 valuable tips below for day trading stocks:

Stay informed

While long-term investors tend to spend a huge amount of time researching the ins and outs of a company before investing, day traders spend more time researching how the share price moves and what causes it. Share prices can be moved by a wide variety of external factors. For example, if figures are released showing UK house prices have seen a sudden drop then you can be sure that will translate to a fall in the share prices of UK housebuilders, or if OPEC announces a sudden cut in production then that should push up the price of oil which in turn supports the share price of oil producers.

This means day traders need to cast a wide net of knowledge and understand how everything - from interest rate hikes to trade wars – can impact different stocks. Plus, the need to stay up to date with the latest economic and trade news is heightened by the fact day traders are operating under tight time frames. Day traders can set news alerts on the stocks they are actively or considering trading and track financial calendars to prepare for major upcoming events or news releases.

Read more about the latest news and trade ideas

Manage your time and money

Day traders are active before markets open, updating themselves with the latest news (possibly from overnight developments) and deciding what stocks they will pursue. They need to remain eagle-eyed throughout the day to ensure they can respond to major developments to ensure they can enter and exit positions effectively. Speed is key.

Read about what a day in the life of a trader is like

Day traders also need to ensure they manage their money effectively and understand their budget. Traders need to set themselves limits. How much leverage are they willing to use? How much are they willing to risk and potentially lose? Understanding the potential losses should take precedent over the potential rewards and traders should stay within their predetermined budgets and risk appetite.

Pick your stocks carefully

Once day traders have budgeted both their money and their time then they can start conducting research and picking which stocks they will trade. Beginners should start small and trade only one or two stocks that they understand well.

Stock screeners can be used to find stocks that have the necessary characteristics for day trading, heavily-traded stocks operating in liquid markets with enough volatility to make a return. This often confines day traders to large-cap stocks and popular mid-caps. Small-cap or penny stocks often offer the volatility that a day trader craves but lack volume and liquidity, which makes them unsuitable.

Use all available tools

In today’s digitally driven world traders must use all the resources and tools available to them if they are to be successful. While stock screeners, economic calendars and company email updates can all help day traders pick and track their trades there are other more vital tools that need to be used to manage risk. This includes deciding whether you will trade using the ‘at quote’ or ‘on exchange’ method: at quote means your trade will be executed immediately but without a guarantee at the exact price while on exchange will guarantee the price but not the execution (as it will only complete if a trade at the desired price can be completed).

At IG, we also offer other tools that day traders can use to help manage risk, such as planning tools like the IG Economic Calendar. You can also learn about how to set up trading alerts to improve your day trading strategy here.

Stick to your strategy and manage your risk

Day traders need to move quickly and this heightens the need to formulate a strategy and follow it. Day traders can be enticed by a number of things that they may not have accounted for in their planning that can lead to profit-chasing endeavours that can, if unsuccessful, set you back significantly. If a stock hits your predetermined level needed to make an adequate profit then exit as originally planned and don’t be tempted to hold on in hope of an even bigger profit. Equally, if you have hit your maximum loss on a trade then exit and cut your losses and don’t be tempted to take another position to lower your cost base. Day traders also need to make sure they stick to their title and close their positions before the end of play if they are to avoid any potential unpleasant surprises overnight. Whatever your plan – stick to it.

You can read more about managing your risk at IG here.

Is day trading for you?

Day trading is not for the faint-hearted and requires a lot of commitment and time. While long-term investors look for stable stocks that can deliver gains over the long term, day traders are extremely short-term focused and hunt for volatility they can capitalise on. This can produce better rewards but also comes with higher risk.

Day traders are often experienced and well versed in the market, understanding the dynamics and how markets operate. You should feel confident in your trades and make them in areas where you feel comfortable. If you’re new to day trading and want to test a strategy out before implementing it then you can use an IG Demo Account to get a feel for things.