Several of our community members have asked us about how to go about day-trading stocks. In this article I will outline our day-trading strategy using BCRX as an example.
What To Look For
First and foremost we want to trade a stock that is either going through a consolidation phase (trading sideways) or is in an ascending channel (most ideal). This ensures that there is a range that we can trade long. A second critical piece of criteria is adequate liquidity. This means there is enough volume that the spread (the difference between the bid and ask price) is not too large and we can enter and exit our position using a limit or market order with ease. Stocks with an average daily volume of least 100K shares usually meet this requirement. Next we want to make sure we are trading fundamentally sound companies backed by quality institutional investors.
Trading stocks with the qualities listed in Table-1 mitigates the risk of large unexpected drops that do not recover (or take a long time). Its also harder for short-sellers to manipulate stocks like these and “have their way” with them. When shorts do push the price down in a fundamentally sound company it presents an opportunity to add or enter with a high degree of confidence (assuming its trending up). Furthermore, if we decide to hold overnight we can sleep easier knowing a public offering is unlikely because the company is well capitalized. For those of you unfamiliar with RSI, it is a technical indicator that reflects the momentum and magnitude of price change. RSI oscillates between 0 and 100 where an RSI of 30 signals oversold conditions and an RSI of 70 signals overbought conditions. Note that an RSI of at least 50 is what we look for on the daily chart. We monitor RSI on the 1 to 30 minute charts for timing our day-trades entering when its close to 30 and exiting when its close to 70+.
How To Do It
Day is trading is possible because stocks do not move in a straight line; they zig and zag setting peaks and valleys. In day-trading we buy in the valley and sell at the peak (as close to as possible). Again, its crucial that the stock is in a consolidation cycle or in an ascending channel. Depending on the volatility (referred to as beta) and daily volume we can trade the same stock multiple times in a day. BCRX is an excellent example of a stock that meets the requirements of our checklist (Table 2) and is trading in an ascending channel (Figure 1).
In trading BCRX last week we would buy when the price is within the orange boxes and sell when it spikes up to to its corresponding green box. Then when the price dips again to the next orange box we would buy again and so forth. Note that we do not buy and sell our entire position. We maintain our “core position” (i.e. a certain number of shares) while swinging/day-trading additional shares. For example, if my core position is 10K shares, then I could trade an additional 2000 shares as the stock moves up its ascending channel.
It looks easy when viewing the chart after the fact, but in practice it can be difficult to catch the absolute tops and bottoms. A good strategy is to draw the channel lines on the chart as depicted, monitor RSI on the 1 to 30 minute charts, and buy at the mid to lower channel areas and conversely sell near the top or above the channel. For drawing charts and monitoring RSI I like to use TD Ameritrade’s “Thinkorswim” platform or TradingView.
A good rule of thumb to practice in tandem with the above suggestions is to buy when the stock is dipping and sell when the stock is ripping. Swinging shares in and out of core positions like this allows us to keep our skin in the game while securing profit simultaneously. Otherwise, any gains are unrealized and can disappear as quickly as they came. Of course, this day-trading strategy can be applied to any stock. I hope this helps, and as always, let’s get this bread!!!!
I am/we are long BCRX