Stock trading can be a risky venture. But with a few basic tips, anyone can turn that volatility into an advantage.
Earlier this month, value investor Mohnish Pabrai took part in a Q&A session with William & Mary College students. Q3 2021 hedge fund letters, conferences and more Throughout the discussion, the hedge fund manager covered a range of topics, talking about his thoughts on valuation models, the key lessons every investor should know, and how Read More
Day trading seems easy at first. Buy a good stock in the morning and sell it in the evening for a few bucks. While that’s not necessarily wrong, the reality is far more complicated. If you’ve ever opened up a trading app or site, you’ve been bombarded with a lot of options. With so much to choose from, it’s easy to lose sight of your goal. New fantasy trading platforms like StockBattle and Investr let anyone try their hand at day trading without the risk.
What makes a stock good for day trading? Let’s take a look at some of the most important things to keep an eye on.
How Should I Choose a Stock for Fantasy Trading?
Picking a stock is hard. Like, really hard. But that doesn’t mean that it’s impossible. In fact, with just a few tips, day trading becomes far less mysterious. So, what should you look for when picking a fantasy trading stock?
Liquidity is how quickly a stock can be bought or sold without impacting the overall price. Stocks with low liquidity may be hard to sell at the right time. Since fantasy trading is all about striking while the iron is hot, missing your moment can cause you to lose out on the profits you should have earned.
The most liquid stocks are typically also the largest companies. Things like ExxonMobil, Amazon, and Pfizer all trade in the tens of millions with regard to share volume. What this means, is there is always someone available to buy or sell a share. No matter how much a stock might rise, it’s worthless if you can’t sell it.
For long-term investments, stability is ideal. But for fantasy finance? You need volatility. How much is the stock changing over the course of a day/hour/minute? Remember, you only make money when the stock rises enough to cover the transaction fees, so pick a stock that has a chance to show some significant swings. As a recent example, let’s look at what happened with GameStop in early 2021.
That’s a lot of sudden changes. Unsurprisingly, this highly volatile stock presented a huge opportunity for gains. But on the flip side, buying at the wrong time can spell disaster.
Every stock is a part of a larger market. Things like index funds, the S&P 500 and NASDAQ are all examples of larger markets made up of several individual stocks. Typically, a stock will rise or fall in correlation with its market. If the overall market is trending up, it’s reasonable to assume the same will be true for the individual stock trends. Stocks that outperform their market are typically viewed as “stronger” than those that underperform.
Get In & Get Out
Investments only pay off if you actually cash them out. It’s important to know exactly what your goals are when day trading. How much can you invest? What is your sell window? At what point do you call it a win, take the money, and run? Having the right entry and exit strategies is a vital component of successful day trading.
Follow the Trends
Admittedly, this is easier said than done. A fantasy stock player’s job is to isolate upward and downward stock trends on the market and to react accordingly. Don’t go against the grain; if things are steadily climbing, take a long position while going short on downtrends.
It’s easy to jump at the first sign of movement but selling the instant your stock rises or falls is rarely a good idea. Stocks tend to “bounce” quite a bit before reversing course. A small loss is often followed by a rebound driving the price even higher and providing a prime opportunity to sell. Be careful, though. Prices typically don’t bounce more than 2 or 3 times before reversing course and trending downward
As we can see here, each rise has a handful of smaller drops which quickly corrected before the trend reversed. These dips provide the best time to buy.
Take Regular Profits
Fantasy trading is a fast-paced activity. Players can’t waste time on stocks that aren’t performing and need to sell at the right time to maximize their gains. If your stocks are up, take the money and run. Likewise, if a pick isn’t performing, cut the rope and move on. Two general tips are:
- During an uptrend, take profits at or slightly above the former price high in the current trend.
- During a downtrend, take profits at or slightly below the former price low in the current trend.
Sell At the Right Time
Typically, it is better to sell strong stocks during an uptrend and weak stocks during a downtrend. When the markets are climbing, it’s a good idea to buy stocks that are rising more aggressively than the market. When it pulls back, a strong stock will not pull back as much (or may not even pull back at all). These are the stocks to trade in an uptrend as they tend to lead the market to even higher levels, potentially providing more profit potential.
When the markets are dropping, it can be profitable to short sell stocks that drop more than the market. When the market moves higher within the downtrend, a weak stock will not move up as much (or will not move up at all). Weak stocks can offer higher profit potential when the market is falling.
This ties into what we talked about earlier. The market doesn’t always trend and trading on stagnant days is rarely worth the time or effort. If the price of a stock isn’t trending, hold off for now. Alternatively, you can switch to a range-bound trading strategy, but this requires far more active maintenance.
Practice Makes Perfect
All the theory in the world isn’t worth a dime without practical experience. This is where a lot of potential investors stall; making new investments is always risky. Until recently, the only way to practice picking stocks was to actually buy some and see what happens. New fantasy finance trading platforms like StockBattle, Investr, and MarketWatch are letting people get some valuable experience at day trading.
Fantasy trading is basically fantasy sports with more numbers. Players can pick up to 5 stocks for their virtual portfolio. Over the course of the fantasy trading contest (anywhere from 15 to 60 minutes) players can see how their stocks perform using real-time NASDAQ data. At the end of the contest, players earn points based on their performance. Fantasy finance allows anyone to practice the basics of buying and selling stocks without the need for an actual investment.
The Bottom Line
Picking the right stocks for day trading requires finding the trends among the noise and capitalizing on them. Things like liquidity, volatility, and correlation characterize the best stocks for day trading. However, it's also important to have the right entry and exit strategies.
Studying trendlines and charting price waves can help you out, but there are lots of ways to trade and none of them work all of the time. Pick your moment, if the market isn’t playing ball, then wait for the right time.