Chapter 6- Different ways of selecting stocks for day trading | Advanced Tips

If you are a day trading for a while, you already understand the importance of this chapter. As a beginner day trader, you might always feel that whenever you enter a trade it goes against you. This is how day trading is and to make trades go your way and become a profitable trade, you need a good stock selection process. Different day traders have a different stock selection process and I am going to discuss a few here which I use in my daily day trading routine. 

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The first one is gap trading. To understand and trade a gap, you need to know why does financial security like stock, futures, etc gap up or gap down. 

What are the gaps in trading?

Whenever financial security opens up or down significantly higher or lower from the previous day closing price its called a gap.

During the aftermarket session and pre-market session, if traders and investors get any sort of news regarding financial security, chances are there that they will place orders before the regular market session. The opening price is calculated through an auction. It’s done by the exchange. The market on open and limit on open orders are used to calculate the opening price. Buy orders and sell orders are matched by an average price that can fulfill almost all orders.

An average price that will fill the maximum pending orders will be the open price. Sometimes this can cause mispricing and financial securities can open gap up or gap down. This mispricing is a good opportunity for day traders to make profits. Either this gap will be filled or the prices might go in the opposite direction. Many trading platforms provide scanners to screen gap up and gap down stocks which makes stock selection easy for day traders. Below example image shows you gap up scanner example for selecting stocks for day trading

gap up scanner example for selecting stocks for day trading

As in the above image, you can use scanners to screen gap down stock like shown in the below image example.

gap down scanner example for selecting stocks for day trading

So scan the gap up or gap down stocks and use a trading strategy to day trade them. Let’s now learn how to use another day trading stock selection strategy i.e. Bollinger band for selecting stocks to day trade.

Stock selection for day trading using Bollinger band strategy

As you all know, the Bollinger band strategy is used by many traders, you can use it for selecting stocks to day trade. Look for buying and selling opportunities using a Bollinger band on daily charts. You can run screeners to filter stocks that have a trading opportunity using Bollinger bands or manually filter stocks. Below you can see a daily time frame chart of a stock that has selling opportunity based on Bollinger band strategy.

bollinger band example for day trading stock selection

Simply add it to your market watch list and name your list as Stocks with buying opportunity. In the same way, you can create stocklists with selling opportunities as per Bollinger band strategy. Once you select stocks for day trading, combine it with your day trading strategies for entry opportunities. Don’t simply jump inside the trade and only trade these stocks if it matches your day trading strategy entry criteria.

Now that you have read two techniques by which you can select stocks for day trading, its now time to look at some common mistakes made by rookie day traders. Beginner day traders make a lot of mistakes and I am going to share some of them with you in this chapter. Below you can read the top 5 of them and day trade safely.

Top 5-day trading mistakes to avoid made by beginners

1. Overtrading

Trading again and again without following your day trading plan will only destroy your capital. In simple words, over trading is the biggest reason why trading capital wipes out in day trading. The best way to stop doing over trading is to have a daily maximum loss percentage.

2. Excitement trade

Almost the majority of day traders get excited when they see financial securities prices moving up and down. If you want to become a professional day trader, you need to control your emotions during trades. Just trade your plans and take trades only when there is a good risk to reward trade as per your day trading strategy.

3. Revenge trading

In day trade, if you are stopped out, don’t get frustrated. Getting stopped out is part of your day trading journey. Many beginner traders get frustrated and trade the same financial instrument again as an act of revenge. This will only erode your trading capital. Stay focused and stay calm when you get a loss. Accepting your loss is all you have to do. On the next trading day, look for another opportunity in any other financial security rather than entering the one which got you stopped out the previous day.

4. Fear

Fear during a trade is your biggest enemy if you are a trader. Fear not only involves in profit booking but also day traders are afraid of missing a trade which we discussed above in excitement trade topic. When you have decided to day trade, create your plan and work as per your plan for at least the next 90 trades. Your day trading plan should have well-defined entry, stop loss and target rules. This will help you overcome fear when you see profits running on your trade and you will be able to resist yourself from exiting early in a trade.

5. Self assumption

Often traders assume that a big move might have ended and it will reverse. It’s always a riskier trade if you are trading against the trend. I keep it very simple in my day trading rule book and follow my favorite 2 % rule to avoid such a mistake. If a particular stock is up by 2 % or down by 2%, I won’t be interested in taking a reversal trade in it. Chances of it retracing back and making new highs or lows are higher than completing reversing.

Conclusion 

So hope you learned how to pick stock for day trading and how to avoid day trading mistakes made by beginners in this guide. Now its time to learn crucial price levels used in day trading i.e. support and resistance levels. In the next chapter, you will learn how to use support and resistance levels like a pro day trade for entry and exits. So proceed with our Chapter 7 – How to use daily support and resistance levels for day trading.

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