Aug

31

Which Stocks To Day Trade?

August 31, 2007 |

This month I have been trading mostly in Intel Corporation (INTC), Cisco (CSCO), Wachovia Bank (WB), Starbucks (SBUX) and Sun Microsystems (JAVA) (funny, but SBUX and JAVA doesn’t have anything to do with each other). The main question I could ask myself is why did I chose them? The answer is simple: I know them.

I have set some principles for choosing day-trading stocks. I haven’t adhered to all of them always, but I may try to stick to them:

  • Trade what you know - What you really know, and I mean it. Trade in sectors you can understand: for me it is technology, banks, and consumer products. Better yet, trade on stocks you own already for the long run. If you own a stock, chances are you have enjoyed its ups, and cried on its downs. Chances are you have found out why it went up and why it went down. If you have been really interested into your investments, you have also studied intra-day movements. Chances are that you will find your best trading stocks in your own portfolio.
  • Bet on winning horses - I have never been a good short. My day trades depend on buying low and selling high – at least at intra-day low and intra-day high. It is not only important that I believe that my stocks will go up, but that the market also believes it – and that they believe it will go up today. I constantly look for Standard & Poor’s 4 and 5 star recommendations, and for what Cramer praises. This also helps me reduce the possibility of getting trapped in a stock that just spirals down, and down, and down.
  • Keep it manageable - I am not rich, not by my standards any way. I do trades of a couple hundred thousand. I depend on a stock to climb 10 to 20 cents before I sell it (under ideal circumstances). Some call that too conservative, but thats how I trade. If I want to be able to make a reasonable amount of money I need to trade in stocks that are below $30 (reasonable considering the tax paperwork, commissions, monetary needs, and most important risk). Sure, I could trade on Google (GOOG) and wait for a couple of dollars going up an down every day. Maybe I should do so. But I find it easier for people to move a $20 stock .20 cents up than a $500 stock $5 up. Then again… maybe it is just my impression.
  • Fundamentalist - Day trading discipline requires that you know when to get rid of a lossing stock. That is one of the most difficult disciplines to build and most people who say they have it don’t – or even if they do, they make mistakes sometimes. A company with good fundamentals is less likely to go spiraling down towards zero value. Maybe it will drop 20%, but even if you didn’t sold on time, you will probably not go broke. I see good fundamentals as a safety net against any lack of discipline I may have.
  • Play the news safely - Some people like volatility caused by an upcoming earnings announcement. Or just after a new product or acquisition is mentioned. I try to stay away from days filled with news, until I can manage them better. But take them into consideration nonetheless. I do not trade on a stock with negative news that day, no matter how good the stock is – call it bad karma.

I will certainly keep making and modifying my own criteria for stock picking for day-trading. What is your criteria?


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