Guide to Day Trading Strategies

Stock Picking versus Risk Management
This is a good time to remind you that you can be a pro
À
table trader with an accuracy rate of 
50% or less, as long as you have a good pro
À
t loss ratio. Being pro
À
table is not about being right 
on every trade, it’s about capping your losses and taking trades that provide the opportunity 
for winners that will exceed the losers. Early on I made the example of the trader who loses 
money despite a 90% success rate. This trader may be a great stock picker, but his lack of risk 
management results in a losing strategy. Picking good stocks is important, but clearly it is not 
as important as managing your risk on every trade. I say this to remind you to focus 
À
rst and 
foremost on your risk and your max loss on each trade. In the next chapter, we will discuss stock 
selection as an extension of risk management. By trading the right stocks, we can improve our 
likelihood for success especially when we combine risk management techniques.

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CHAPTER 3
STOCK SELECTION - CHOOSING 
THE RIGHT STOCKS TO TRADE
In the last chapter we talked about the importance of risk management. We will continue to touch 
back on the theme of risk management and emotional conditioning throughout this chapter. 
By trading only the strongest stocks and applying the principles of good risk management, 
we can give ourselves a huge statistical advantage for success. There are thousands of stocks 
available to trade each day, but only a few that are actually good candidates for day trading. 
There are so many that a new trader can quickly become overwhelmed. Often, new traders 
refer to a watch list of companies they are familiar with. While this may be suitable for some 
longer term investment strategies, it is not appropriate for day trading. For day trading, there 
are usually only a small handful of stocks each day that I would consider the right stocks to 
trade. We have a very speci
À
c list of requirements for what makes a stock worth trading on any 
given day. Most day traders will trade hundreds of different stocks each month, rarely trading 
the same stocks for more than a few days at a time. The reason we trade so many different 
stocks is because we are only interested in stocks with volatility and heavy trading volume. 
Stocks trade on heavy volume because they have a high level of retail interest. High levels 
of retail interest are typically driven by news, but are sometimes driven by stocks trading at 
extreme highs or lows. If you look at almost any chart, you will see a few days where the stock 
traded on extremely high relative volume. Those days are often accompanied by a big gap 
on the chart. Those are the days we would be most interested in trading that stock. I often 
remind our students that on any given day, there is a stock having a once in a year event. As a 
day trader, we have to be willing to jump from stock to stock in order to 
À
nd the type of price 
action that can result in at least 5-10% intraday moves.

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