Some of my portfolios have been sitting in cash since the middle of last week…
Because we’re in a news-driven market.
Right now, stocks have the ability to turn from North to South (or vice versa) on any given tweet from the President, a comment out of China, or an interview from the Fed Chairman, Jerome Powell.
Part of being a successful trader is identifying your market and trades — what I mean by that is — identify your bread and butter trades and then take advantage of them.
Another part of the success equation is patience– know when to layoff the keyboard and wait.
(While this hasn’t been my market over the last two weeks, I haven’t been forcing the issue either.)
So who does this market favor the most right now?
And while I’m not a day trader, I have teamed up with one of the best day-traders I know to help my Millionaire Roadmap students, Taylor Conway.
Each month, Taylor conducts a 3-hour training session with MRM clients where he talks about the strategies used in day trading, as well as the mental side of being a full-time trader.
Now, if you’ve ever wondered what makes day trading so different, and if it’s even right for you (it’s not for most folks)… then you’ve got to check out this day trader’s checklist.
It basically runs you through the thought process of a day trader.
Heck, even if you aren’t a day trader or aspiring to become one… you should still read this.
Because the market consists of all different types of players, and the more you learn about their tendencies, the more informed you’ll be as a trader, and the better the odds will be stacked in your favor.
Table of Contents
The Ultimate Day Trader’s Checklist
Since day traders need to be quick to take on opportunities at any point… they don’t have much time to actually know the ins and outs of the company. In other words, the fundamentals don’t really matter much to day traders.
What does matter is the overall sentiment, price action, and statistics in the stock.
They run through a series of questions – a Day Trader’s Checklist – before they take on a position.
Some things that traders will look for are:
- How much the stock is up or down in percentage terms.
- The liquidity in the stock. This lets traders know whether they can buy and sell the stock easily without too much slippage.
- Catalysts. Day traders will look for anything that caused a stock to spike up or plummet and whether the price action is in line with the news.
- Floating shares, outstanding shares, and short interest
With that being said, let’s look at the process of how a day trader finds opportunities.
The percentage change
When traders are looking to place bets, one of the first things they do is see how much the stock is up or down in percentage terms.
Basically, the net percentage change on any given day lets you know how much the stock is up relative to its closing price. For example, if you look at some of the percentage changes for some of the most-active stocks this morning…
Day traders like to find stocks that are moving fast because that means there are more ways for them to make money due to the volatility.
Think about it this way… if a stock is flat on the day (it hasn’t moved a whole lot)… chances are, that stock isn’t going to be very lucrative for day traders.
However, when you see a stock like Rhythm Pharmaceuticals (RYTM) up 27.37% during the pre-market… there are more ways for day traders to make money.
For example, some day traders will buy the stock and look for it to build momentum during the day… while others may look to short the stock for a potential pullback.
If you’re going to be day trading, one good rule of thumb is to look for stocks that are moving during the pre-market so you can game plan and keep a watchlist of stocks you want to trade.
What’s the liquidity like in the stock?
Once day traders find which stocks they’re going to trade for the day… they’ll look to see how liquid the stock is.
What I mean by that is how easily it will be for you to buy and sell shares without getting chopped up by the bid-ask spread.
If you don’t know what the bid-ask spread is… it simply tells us the difference between where traders are looking to buy (bid) the stock… and where traders are looking to sell (ask) the stock.
For example, if the bid price is $19.95, while the ask (sometimes called the offer price) price is $21.00… then that stock is considered illiquid because it’s hard for you to get in the stock… and chances are, no one is going to buy or sell right at the bid or ask price because the spread is very wide.
What that means is if you actually get into the stock and try to sell… it’s going to be very difficult for you to get out of the position.
One quick way to find out whether a stock is liquid is by looking at its average daily volume (ADV). The average daily volume lets us know how actively traders are buying and selling a stock.
Basically, the higher the ADV the better.
A good rule of thumb is to only look for stocks with an ADV of at least 750K.
However, there are some times when you should just quickly glance at ADV and just compare it to what the stock is doing on the day.
For example, let’s say a stock has an ADV of 250K shares a day… but in the pre-market already 500K shares exchanged hands and the stock is gapping up by 20%.
Well, even though the ADV is low… the stock is very active for the day, and that lets day traders know the stock is fairly liquid and they could still trade it, even though the ADV is low.
For example, in the pre-market, RYTM was up over 20%… but it only has an ADV of around 182K. That means on any given day (if there’s no news), traders can expect the stock to be fairly illiquid with wide bid-ask spreads.
However, if you looked at the pre-market activity, the stock traded nearly 600K shares, over 3 times its ADV before the market even opened… that lets us know that a lot of traders are buying and selling the stock… which ultimately leads to more liquidity and tighter bid-ask spreads.
Is there any news in the stock?
After traders drill down their watchlist for liquid stocks to day trade… the next thing they’ll look for are catalysts.
Basically, they’re looking for any event that caused the stock to gap up or gap down. Catalyst events include press releases, earnings announcements, analyst ratings, and data releases, to name a few.
So if a stock is moving a lot, and it’s liquid… and they’ll see whether the news lines up with the price action.
With catalyst plays, you have to be quick and get the news right.
For example, Weight Watchers (WW) gapped up this morning… and if you saw the news this morning, there was a trade to be made.
You see, the reason why WW gapped up this morning was due to the company’s earnings release. More specifically, the company raised its full-year guidance, which indicated the company would make more money in the coming months.
If you don’t know, markets are forward-looking… and if a company raises guidance that’s bullish news.
So you could’ve actually bought WW around the open and locked in 2 points in the name in just a few minutes.
The next thing traders will look at is the floating shares and short interest.
Supply and demand drive price action… and if you know how much supply is out there, it allows you to find stocks that could move a lot… fast.
In trading, the floating shares let us know the supply in a stock. Basically, floating shares is the number of shares available to trade in the open market.
Just think back to any old economics class you might have had… if there’s a low supply but high demand for something… what happens to the price?
It’s the same idea with stocks.
Stocks with a low number of floating shares are those that can move 20%+ in a day if there’s a catalyst. On the other hand, stocks with a large amount of floating shares typically don’t move a whole lot… even if there’s a catalyst.
Well, when there’s a lot of supply out there… that means there’s a lot of competition. For example, if you look at Apple Inc. (AAPL), there are over 4B shares floating… that’s a lot of supply.
For AAPL to move up 20% in a day… it’ll take a massive catalyst and a lot of buyers.
Think about it this way… if AAPL has 4B shares floating… that means a large percentage of float needs to be buyers. In other words, when a stock has a high float… it’s very unlikely the demand will significantly outweigh the supply.
When day traders look at the number of floating shares… they’ll also look at the shares outstanding, which gives us an idea of how much a stock can move.
The difference between shares outstanding and shares floating is the fact that share outstanding includes the treasury shares (shares of stock owned by insiders that are not available for traders).
However, when calculating the overall market value (the market cap) of a stock… the shares outstanding is used.
For example, AAPL has 4.62B shares outstanding and a market cap of over $900B. Think if AAPL were to move up 20% in a given day… that would mean the stock would gain $180B in value… which is very unlikely. The same goes for the downside.
Short interest also matters when you’re day trading.
Short interest lets day traders know the percentage of the floating shares that have been sold short and are still open. Basically, short interest gives us an idea of the overall sentiment in a stock.
When stocks have a high short interest… that means investors are pessimistic… and sometimes it might be an indication that traders are overly pessimistic in a stock.
What that can lead to is a short squeeze.
A short squeeze occurs when a stock with a high short interest (around 20% or higher) has a positive catalyst and spikes up… and the shorts can no longer take the pain and are forced to cover their shares.
If you don’t know, in order for shorts to close out their position… they have to buy shares in order to cover. Basically, what happens when shorts cover their position is they add to the demand… and when there is heavy demand… that’s when we see massive moves.
For example, WW has a short interest of 18.75%… and just around 46M shares floating. This is what we would call a short squeeze candidate.
Well, if you pull up the price action in WW… it’s just been ramping during the first 30-minutes of trading today…
… and it’s quite clear the shorts are being squeezed right now.
If you follow this checklist, you’ll be in a position to succeed in day trading. However, if day trading still seems unfamiliar to you… and you want to learn the ins and outs of day trading… there’s only one place you can do that here at RagingBull… and that’s in the new Millionaire Roadmap.
Every month, Taylor Conway (who turned $10K into $2.33M in just 3 years) gives a Day Trading Masterclass and gets you up to speed on what you need to know to become a successful day trader.
Not only does Millionaire Roadmap teach you how to day trade… you’ll also be able to learn other lucrative trading strategies, giving you more ways to profit… strategies that helped me become a millionaire trader…
…. strategies that helped Kyle Dennis turn $15K into $7M in just a few short years.
… strategies that helped Nathan Bear make $2.22M in just a few short years… and so much more.
If you’re ready to take the next step and become a successful trader… and join many other traders taking advantage of the new Millionaire Roadmap chatroom…
… then click here to get started.
[Ed. Note: Jason Bond runs
JasonBondPicks.com and is a swing trader of small-cap stocks. In 2015 he earned a 180% return on his money. Then in 2016 he turned a $100,000 account into $430,000! Discover How He Did It]
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