In order to be successful at day trading, a trader needs to learn and practice the necessary skills. They need to exercise discipline in entering, managing, and exiting trades. They need to routinely audit their trading success and failures and return to simulation trading when it is necessary to make changes in their day trading strategies. Unfortunately, one can do all of this and not be all that successful in day trading. It is also necessary to identify futures, foreign exchange pairs, and stocks that provide sufficient volatility to allow for trading profits. How does one build a winning watchlist by identifying hot futures, stocks, or currency pairs for day trading?
Market Scanners
Once upon a time it was a real chore to sort through futures contracts, stocks, or currency pairs to identify those that were the most volatile and thus potentially profitable to trade. Today there are many market scanners that will give you a list of tradable assets by degree of volatility. A common cutoff for these lists is a 5% average difference between open and close over the preceding months. It is vital that anyone who picks a commodity future, stock, or currency pair from such a list also pay attention to trading volume. For example, a penny stock may exhibit wide price swings but leave the trader trapped in a losing position because no one will buy or sell the asset in question when the day trader wants to exit their position.
News Catalysts
It can be all too easy when day trading to be paying so much attention to technical indicators of the assets that you are trading that you miss out on trading opportunities in the wider world. This is why many traders have a news feed open as they are trading. Some events like a Federal Reserve interest rate announcement or a department of agriculture crop report occur at a scheduled time but other news can be random. Keeping an eye on what is going on in the wider world so far as it may affect your day trading is always a wise decision. There are times when trading the runup to a news release can be profitable and there may be trading opportunities after the news. As a rule day traders should avoid making trades immediately preceding such news, during the news, and immediately afterward because of the risk of serious slippage in one’s position. In other words, you are looking for predictable volatility and not unpredictable or potentially dangerous volatility when building your watch list and then trading from it.
Technical Criteria
When a day trader has a watch list of “hot” commodity futures, stocks, or currencies they should not just begin to blindly trade those assets. Profit in volatile markets comes from anticipating the direction and magnitude of market swings and not just the fact that the market is volatile. When the day trader has picked a tradable asset from their list they will then use technical indicators to judge where the trading opportunities are. Technical criteria will help guide their entry, management, and exit of trades, always with discipline in following a solid day trading strategy.
Sector Rotation
Within all markets, volatility can come and go. Asset prices can also follow seasonal trends up and down. Interest rates go up and some stocks go down but others, like banks, go up. The point is that sector rotation in what one is day trading may be advantageous and, in fact, necessary for continued profit. One’s “hot list” of tradable assets will never be permanent. Rather a day trader will need to routinely update their list of potentially profitable assets.
Economic Calendar
How the economy is doing affects futures, stocks, and currency pairs. In the case of day trading foreign currencies, the chore can be more difficult as one is concerned with the economies of two different countries. In the case of futures on agricultural commodities, crop reports from all major producers may be important for day trading. As with things like earnings reports, these events can be profitably traded. However, one is generally wise to avoid placing and trying to manage day trades immediately before, during, and after major events on the economic calendar.