Many times new traders come to me and ask what stocks they should trade. This question can be answered in two ways, I could tell them which stocks I am currently looking at or I can give them certain criteria and let them find stocks on their own. I feel this is the best way to learn, although most new traders tend to gravitate to stocks they have already heard about or know well from the news, such as Microsoft, Dell, Apple and the like. I very often will hand them a copy of Investor’s Business Daily or log onto to one of the better online trading analytics programs such as Nextrend, and tell the new day trader to look at the most actives, percent gainers, losers, high volume, etc, to get a feel for what’s going on. With the Nextrend analytical program I ask them to input trading criteria such as a minimum average trading volume, among others. This differential between thick and thinly traded stocks is a great way for a newbie to begin the stock picking process for day trading.
There are substantial benefits to online trading thick stocks versus thin ones, so for day trading lets mention some of the attributes of a thick stock. Lets say a thick stock is one in which the average daily volume is 1,000,000 shares or more. If you trade a stock with substantial volume, in addition to having smaller spreads ( this was a very important factor when stocks still traded in fractions, a bit less important after decimalization), the trader may have more time in which to react to any movement in that stock. This extra time is very beneficial if you are new to day trading as the thicker the stock, usually the more liquid it is. If you make a mistake on the anticipated move or the trend of the market, the online trader can usually exit that position and minimize a loss. That’s right; it’s a method of minimizing risk! Online traders who are not trading with vast capital resources need to hone their skills on thick stocks before playing the thin issues that are may be very difficult to get out of in a hurry without substantial losses. The topic of day trading thick versus thin stocks is risk management. Remember, you have to walk before you can run, and it helps to have booked some profit before taking additional risk.