How to day trade volatile stocks

LOS ANGELES MarketWatch — Making money in stock markets driven by shrewd electronic programs that execute trades faster than the blink of an eye can be tough for a retail trader, but longstanding principles of planning and discipline can hold your ground in volatile sessions.

Spikes in the VIX tend to mirror heightened market volatility. A better approach for individual investors is to carve a niche. That strategy, plus preparing long-term weekly charts, can result in trading success, he added.

While high-frequency trading, or HFT, has been in use since around , its role in volatility remains a hot topic. High-frequency trading is a form of algorithmic trading that uses ultra-fast computer programs to transact millions of orders in milliseconds. The computers scan numerous markets and data in search of opportunities that can allow traders to profit from tiny changes, even a fraction of a penny, in asset prices.

Some argue that HFT puts both individual and institutional traders at a disadvantage because the rapid-trading, quick orders and sudden cancellations make it virtually impossible for them to compete. Whether you battle the high-frequency shops or attempt to fly under their radar, anyone who decides to trade stocks must first understand risks that have existed since long before computers entered the scene.

Here are four important trading rules to remember:. A lot of people when they buy at the market suffer an instant loss or they are just wrong. For example, Carr said, if the QQQs closed at Turner, on the other hand, favors trading stops.

One advantage to the HFT environment is that on highly volatile days, bid-ask spreads are tight and trade execution is better. Still, most people would want to make only one or two trades a day because commissions, taxes and other fees can add up, Carr added.

Staying out of the mainstream can help too. Tuner said she tends to avoid tech stocks, which appear to be favorites of the HFT crowd.

Instead, her strategy focuses on more conservative issues such as food and utility stocks. Accordingly, he added, traders should search for range-bound stocks that are breaking out above their trading range. Conversely, he added, shorting a stock should take place below the trading range, or when it breaks below a week high. One exit signal he uses is the well-known cup-and-handle strategy, in which a stock or an ETF falls and trades in a consolidated range, then returns to the previous pivot point or the point where it began its pullback.

This pattern is preferable as long as the overall stock market is flat or rising on the day. If the market slides and a trader is short, hold the position, Carr said. Follow her on Twitter MWMozee.

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How Traders Can Take Advantage of Volatile Markets

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