by Alvaro Oliveira

Basic Criteria

What basic characteristics should a stock have in order to make it a suitable candidate for potential day trading? In my view, the most important attributes are:

● Liquidity

● Volume

● Volatility

● Price Transparency

Each of the above attributes will be discussed separately below.

1. Liquidity

Liquidity, broadly defined, is the existence of a sufficiently large number of buyers and sellers in a stock to permit one to quickly and easily acquire or exit a position in the stock. Good liquidity is important to the day trader who requires fast executions at relatively predictable prices. High liquidity also has the additional advantage of (generally) reducing the bid-ask spread for a particular stock therefore reducing execution costs for the day trader.

There is no quantitative measure of liquidity. Liquidity is based on a number of factors, the most important of which are:

● Volume of transactions on the market (the higher the better)

● Number of shares outstanding (the more the better)

● Breadth of ownership ( the higher the number of shareholders the better)

● Number of market makers (the more the better)

Most of the stocks of the larger companies on Nasdaq and the NYSE will have a sufficient degree of liquidity to make them potential day trading candidates. This is particularity true of stocks included in the major indexes such as the Dow Jones Industrials or Nasdaq 100. On the other hand, relatively few small-cap companies would have sufficient liquidity to be attractive to most day traders.

2. Volume

Volume is a component of liquidity and is easily measurable. A good day trading stock should trade at least 500,000 shares a day and preferably much more. Stocks with high volumes permit the day trader to acquire or sell a large quantity of stock without unduly affecting the price of the stock.

3. Volatility

Volatility refers to the actual or expected price movement of a stock (either up or down) over a particular period of time. In the case of day trading, the period of time to look at is a single day. Stocks which tend to exhibit little movement in price during a typical trading day are not good candidates for day trading. A good rule of thumb is to select for trading only those stocks which tend to fluctuate in price by at least $2.00 in a typical trading day.

4. Price Transparency

Price transparency refers to the ability to obtain information as to the order flow for a particular stock. This is also referred to as market depth. The Nasdaq II quote system provides information on all the bids and asks at various price levels for a particular stock and not just the "inside market" quote (i.e. the highest ask and lowest bid). In addition, the quantities of stock being offered and bid for at the various price levels are made available. For day traders who have arranged for access to Nasdaq Level II quote screens, this greatly helps the trader in assessing the relative strength or weakness of a stock and its likely direction in price.

By way of contrast, NYSE quotes display only the highest bid and lowest ask prices. Only the specialist (market maker) responsible for handling orders in a particular NYSE stock has knowledge of the complete order flow for the stock. Accordingly, many day traders prefer to trade only Nasdaq stocks. This is not to suggest that NYSE stocks are not good candidates for day trading under certain circumstances. However, there is less price transparency on this exchange than on Nasdaq.