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I talk a lot about specific real-time stock setups and factors that may have an immediate effect on the stock price in my chatroom.

What’s often missing from the picture is the essential due diligence I always perform— which gives me a general framework for the trades I am or am not taking.

They say the battle is won or lost before it is ever fought. Narrowing down what you’re going to trade on any given day can help avoid decision fatigue, force trades, and any other crippling lousy habit that negatively impacts traders.

That’s why I’m going to share with you the essential data points I collect—before I ever hit the buy or sell button.

Add these to your arsenal and you’ll be a more informed trader.

Market Cap

I did say I’d talk about basic stuff, so here we go.

For those unfamiliar, a stock’s market cap is the simplest and most commonly used measure of the company’s value.

Calculating it takes simple arithmetics:

Market Cap = Price * Number of Shares Outstanding

As you figured, it represents the current market value of the company’s shares, plain and simple.

Despite being a very high-level data point, I always like to know the stock market cap before putting on a trade.

The thing is – it can provide me with a rough idea of how much a name may move long before I do any real due diligence.

Think of it this way: which stock will require a more significant news catalyst to have a game-changing impact on its business – the one with a market cap of $3B or with $50B? Or with $200B? Or $600B?

It will take a lot to surprise AAPL’s investors at its $2.1T valuation to get them to buy up the name even 10% higher!

At the same time, with a smaller company, an average good catalyst may have a profound impact.

Besides, a big stock with lots of high-priced shares out there will take a lot of physical demand to get going, which brings me too…

Share Float

When I spoke about market cap, I mentioned the total number of shares outstanding.

However, the share float figure is quite different – it counts only those shares that are in open circulation and can be freely bought and sold.

Outstanding shares are all stock of the company combined. These include restricted shares, those held by insiders, and the big funds who intend to sell them.

The Share Float is the net number – it subtracts all the stock that can’t be traded.

The effects of it are profound, imagine 2 companies with $1B market cap:

  • Company A has 100M outstanding shares and is trading at $10, with 90M of these floating freely
  • Company B also has 100M shares trading at $10, but only 15M of these are in the free market

If a piece of news comes out, causes a spike in demand and the public wants to buy 10m shares – which stock will have a supply problem and move a lot higher?

Therefore, Share Float may be a good reference point to understand the supply and demand dynamics of a name.

Short Interest

I don’t think a day passes without me talking about short squeezes and for a good reason – they can be the rocket fuel of a momentum up move.

I spoke about them at length on a number of occasions and won’t be doing so this time around, but the key point is: when short traders are forced to cover at the risk of blowing up, they will bring in significant demand.

Thus, a stock with high short interest will have more aggressive upticks than a stock with an average short interest.

I know the short interest of all names on my watchlist and I strongly urge you to do the same.

ATR

Last but not least, there’s Average True Range, commonly known as ATR.

ATR is a measure of volatility. It’s calculated as an average of a series of daily true ranges.

Daily True Range is, in turn, the larger of the three:

  • Current high – current low
  • Absolute value of ‘current high – previous close’
  • Absolute value of ‘current low – previous close’

As you can see, it’s an indicator that smoothes out daily price changes and gives you an idea of how much the price has historically bounced around.

It’s a lagging indicator and it sure isn’t perfect, but it can be a reference point of what magnitude of a move you can expect.

Now look, you shouldn’t be basing your entire thesis around any of these.

Rather, they should serve as small branches of your big decision making tree.

I hope you can use them to your advantage.

Author:
Jason Bond

Jason taught himself to trade while working as a full-time gym teacher; his trading profits grew eventually allowed him to free himself of over $250,000 in student loans!

Now a multimillionaire and a highly skilled trader and trading coach, Over 30,000 people credit Jason with teaching them how to trade and find profitable trades. Jason specializes in both swing trades and in selling options using spread trades, which balance the risk of selling options. Jason is Co-Founder of RagingBull.com and the RagingBull.com Foundation which donates trading profits to charity. So far the foundation donated over $600,000 to charity.

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7 Comments

  1. Hello , Jason how are you? hopefully,life going to be very well ,it’s my pleasur to see your mail causes of we know your busy much as a business person etc. despite being you sand for me valuable mail please keep in tuch try my best to read and understand.it’s make me happy although. thanks for sharing those thing ,be healthy have a good night.

  2. Hey Jason,
    Thanks for your teaching… I am so glad RB is back, you were really missed. I’ve only been
    trading about a year or so. Thank you for explaining all the concepts simply, it is invaluable to the
    beginners (like myself).
    I love most of the changes, I am enjoying both, a) more specific “lessons” and “training” (like this one in the
    updates, as well as Ben’s & Mike Park’s), and b) love the new format of trade planning rather than simple alerts. And the live charting & trading are perfect too. It is superior and fantastic!
    Thank you, enjoy the weekend!
    Denise

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