How to Day Trade for a Living: Tools, Tactics, Money Management, Discipline and Trading Psychology

Experienced traders are sensitive to being in the right stocks at the right time. As I mentioned, traders are only as good as the stocks they trade. I and the traders in our community use a scanner every morning that is programmed to find Stocks in Play based on the following criteria:

Why these criteria?

When there are some fundamental catalysts, there will be unusual pre-market activity and a Stock in Play will have gapped up or down before the market opens with a significant number of shares being traded (such as 50,000 shares) .

I look for highly traded stocks, so that buying and selling 1,000 shares won’t be a problem. That is why I am looking at stocks with an average daily volume of over 500,000 shares. I also am looking for stocks that usually move in a good range for trading. That is why I look at Average True Range (ATR). ATR means how large of a price range a stock has on average every day. If ATR is $1, then you can expect the stock to move around $1 daily. That is a good number. If you have 1,000 shares, you may profit $1,000 from the trade. But if ATR is only 10 cents, then that trading range is not attractive for me.

Let’s look at Figure 4.2, which is an example of how my watchlist will form. On June 1, 2020 at 9 a.m. New York time, my scanner showed these stocks:

As you can see, I have highlighted the second “Chg Close” and the Float columns on my watchlist. The second “Chg Close” column represents how much the price of the stock has changed since the markets closed the previous trading day. In this instance, for example, the price of CrowdStrike Holdings Inc. (ticker: CRWD) has gapped up 3.2% in pre-market trading. From over 4,000 stocks, I now have only seventeen candidates (the stocks that have gapped up or down by at least 2%). I will go over each of them before the market opens at 9:30 a.m. I will check the news on each of them to learn why they gapped up or down. Is there a fundamental catalyst for that stock? Has there been any news coverage or extreme events for that company?

From those seventeen candidates (for that day, the number varies each day), I usually select two or three stocks to watch closely. You cannot watch seventeen stocks, and regardless, there are usually no more than two or three good candidates. I watch the best two or three candidates closely on my screens, looking for potential setups. I plan my trades before the market opens (I provide some thoughts on how to create if-then statements in Chapter 10) and then I wait for the market bell. I then trade my plan.

I mentioned above that, as a rule, I do not trade stocks with an enormous short interest, nor with a daily volume likely to be less than 500,000 shares intraday. A high short interest indicates traders or investors think a stock’s price is likely to fall. But the challenge with high short interest is that these stocks are more prone to a short squeeze by bullish investors and traders. A short squeeze occurs when short sellers panic and are scrambling to return their borrowed shares, forcing prices to increase quickly and dangerously. You do not want to be stuck short in a short squeeze.

I am sometimes unable to identify a stock that fits these criteria for being in play on the Gappers scanner. In those cases, I watch my intraday real time scanner to find Stocks in Play for momentum or reversal or other types of trades. My first choice though will always be a Stock in Play that I find on my pre-market Gappers watchlist.