How to Day Trade with Daily Volatility

Buy Low Sell High How to Day Trade with Daily Volatility Stock Selection

Day Trading is process of buying and selling the same stock in the same day. Typically, day traders make a profit by using the daily volatility of the stock (range of price ups and downs) in order to make a small percentage gain on their money. Long-term successful day traders often aim for only a 1% to 2% increase per trade. However, through the use of leveraging money in a margin account, the actual gains are much larger.

For example, a trader may trade with $50,000 of their own money and borrow $50,000 which means they are trading with $100,000. With a 2% gain of $2,000 the trader has actually made a 4% gain on their money since they are only trading with $50,000 of their own cash (2,000/50,000 = 0.04 or 4%).

In order to day trade successfully, it is important to cover the topics of stock selection and trading strategy.

Related: Stocks vs Forex: Why Trade Forex?

Stock Selection: Determining Volatility with StockFetcher

StockFetcher is a free online tool that can be used to find volatile stocks. The guest portion of the website only shows 5 stocks at a time, however you can modify the filter and use columns to rearrange the stocks in order to generate different lists of 5. Signing up for an account will remove these restrictions, but it really is not necessary since you can modify the search criteria to generate different lists.

Go to and select "New Filter" at the top of the screen. Then copy and paste the following information into the stock screen box:

  • Show stocks where the average day range(100) is above 5%
  • And show stocks where the average day range(100) is below 9%
  • And price is between $10 and $100
  • And average volume(30) is greater than 4000000
  • And exchange is not amex
  • Add column Average Volume(30)
  • Add column Average Day Range (30)

The first line provides only stocks with an average daily volatility range above 5% using the last 100 days. The second line limits the daily stock volatility to an average of 9% (this line is optional and the number can be changed to narrow your list). The third line determines the current price range.

The fourth line is to ensure that the the monthly volume is enough to easily enter and exit trades. Using this line will generate only stocks that have had an average 30 day trade volume of at least 4 million. Ideally, we do not want the number below 2 million. The fifth line is to prevent ETFs on the AMEX from displaying in the results. The last two lines are to add columns to sort by, allowing different top 5 lists to be generated.

After you have a list of volatile stocks, you will need to examine each stock's chart to look for volatility errors.

Stock Selection: Volatility Errors to Beware

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 losing pick.

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 Volatility

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 Wave Trends

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 downward.

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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Day Trading Strategy Basics

Pattern Day Trade with Less Than $25,000

Best Online Stock Trade with $0 CommissionDay Trade Articles

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