Stock Selection: Volatility Errors to
Significant price moves can cause
errors when determining stock volatility. If a stock has a massive
continuous drop in price within a month, then the volatility is going
to appear large because everyday the open is much higher than the
close. This stock would be a good option for shorting stock in a
margin account if the drop is still occurring steadily. However, if
you are hoping to buy long and then sell, this stock would be a
Sometimes the average daily volatility
is actually not that high, but a one day huge price move caused the
average daily volatility to be skewed to a higher amount than what it
truly is. Be sure to examine a stock chart to make sure the daily
volatility is consistently high, rather than just one week when the
stock dropped by 50% while the daily volatility is actually only 1%.
If for some reason you do not have
access to StockFetcher, then you can manually estimate the volatility
of individual stocks by using the Average True Range (ATR). Simply
take the ATR and divide by the most recent close price. This gives
you a rough estimate of the daily volatility.
Stock Selection: Daily Frequency of
Look at a stock chart and see how
frequently prices move up and down within a day. Some stocks may have
high volatility, but have the trend of going up half the day and then
going down the other half. However, other stocks may have high
volatility where they have multiple ups and downs every hour.
The frequency of volatility you are comfortable trading with depends
on how long you want to stay in the trade. If you are okay with
staying in a trade most of the day, or at least for a few hours, then
these larger waves are for you. However, if you want to be in and out
of a trade within an hour, selecting stock with more frequent daily
volatility is ideal.
Stock Selection: Monthly Volatility
Volatility waves occur at different
levels of time. If you look at a day chart, you will see small waves.
If you zoom out to a month view, you will see that there are larger
monthly waves. If you zoom out to a year view, you will see that
there are even larger volatility waves that stretch across years.
These large yearly waves are made of of the smaller monthly waves
that follow the overall trend of the yearly waves. Likewise, the
monthly waves are made up of even smaller daily waves that follow the
overall trend of the monthly waves.
When you are deciding how to trade
stock, the monthly wave must be considered. If the current monthly
trend is downward, then there is a good chance that the overall price
will trend down during the week. This type of downtrend would be a
good signal to short sell stock, because the overall monthly trend is
Understanding this monthly trend
provides a safety net, so that if you make a mistake or you are
disconnected from the internet, you will still likely make a small
gain or at least avoid significant losses.
Now that we've covered the basics of
stock selection, we need to examine day trading strategy.
Stocks vs Forex: Why Trade Forex?
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