Traders whose business is day trading stocks enter and leave positions within a given trading day. Stock day traders rely on technical analysis instead of fundamental analysis when taking advantage of price fluctuations that occur during a single trading session.  Success when day trading stocks requires an effective trading system, diligence, discipline, and attention to detail. While day trading stocks can be quite profitable, day trading taxes on stocks are higher than when day trading commodity futures which a trader should take into account when deciding what type of equities to day trade.

Best Day Trading Stocks

The best day trading stocks are those that trade in high volume and liquidity. These factors are necessary for a day trader to get the most advantage out of their technical analysis software. Because profits come from volatility, stocks that are on the rise in a bull market or falling in a bear market can be good choices. Many day traders forego individual stocks and instead trade ETFs (exchange traded funds) that track the S&P 500, Dow, or NASDAQ. These ETFs are highly liquid and trade in high volume.

How to Pick Stocks for Day Trading

When picking stocks for day trading, limit your choices to ones that trade in high volume, are very liquid, and have lots of “followers.” Then pick stocks that are moving in a trend. This movement will happen in fits and starts and provide you with opportunities to profit from movements both forward with the trend and in reverse when profit taking occurs. A day trader can use a stock scanner to find those equities currently trading at the highest volume or liquidity.

Day Trading Penny Stocks

Day trading penny stocks can be dangerous. This is primarily because these are generally small companies whose stocks trade with low liquidity and volume. An exception would be a large cap company that has fallen on hard times and now qualifies as a penny stock. Such stocks may at times be subject to lots of market speculation and at those times will provide the sort of volume and liquidity necessary to day trading. Another issue is that penny stocks can be subject to a type of market manipulation known as the pump and dump so be careful when day trading penny stocks.

Taxes on Day Trading Stocks

We discussed this issue in our article about day trading taxes. All of the trading profits from day trading stocks are taxed as ordinary income. Deductible losses are capped at $3,000 unless you go through the steps to get trader tax status. For comparison, when day trading commodities and futures your losses are not capped and 60% of our profits are taxed as long capital gains and only 40% as short term capital gains, which is the ordinary tax rate. This is a big part of why we encourage our traders to look seriously at commodity futures day trading instead of day trading stocks.

Stock Market Day Trading

Stocks move up and down for two basic reasons. There is something about the stock that makes it attractive or not. And, something is going on in the general economy or market that is affecting prices. Many who engage in stock market day trading find it easier and more profit able to trade the larger market than try to profit from individual stocks. This is why so many day traders trade the SPY (SPDR S&P 500 Trust ETF). This index fund generally trades between 100 and 200 million shares a day.

Volatile Stocks for Day Trading

Because day trading profits generally come from volatility, scanning for volatile stocks for day trading can be useful and profitable. The key to success when you do this is to learn about the company and try to understand why the stock has become volatile. What factors are driving it up and down and what will be the entry and exit points for trades that will result in profits? When choosing volatile stocks with which you are not familiar, be sure to pay attention to trading volume and liquidity and be careful not to be caught in a pump and dump scheme.

Stock Day Trading Rules

As we noted in our article about pattern day trading, there are stock day trading rules that apply when you buy and sell or sell short and buy within the same trading day and do this four or more times over five business days. If this trading constitutes more than 6% of you trading activity, your broker will identify you as a pattern day trader. When this happens you will have to maintain at least $25,000 in a margin account at all times. Fortunately, when you trade commodities and futures you only need to have money in your account to cover what is required for each futures or commodity trade. This fact, plus the tax issues with day trading stocks should be considered when deciding which equities to day trade.

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