Today I’d like to discuss how to research and find the right stocks to trade. There are thousands of stocks listed on the market. Out of all the myriad of stocks moving each day, how do you find the right ones?
Today we’ll talk about just that.
You see, you’re only as good as the stocks you trade, and developing a process to find the right ones for an opportunity is a vital part of becoming a professional trader.
Every trader needs to develop a process to find the right stocks to trade. It takes a lot of time and hard work to figure out which types of trades suit you best, and today I will discuss a number of ways to find stocks with opportunities on any given day.
Largest Percentage Gainers and Losers
An essential tool to finding stocks is a market scanner. I want to know which stocks are moving more than most on a particular day and why. The obvious place to begin is with percentage gainers and losers. Before, during, and at the end of every trading day I run through all the biggest percentage movers for the day.
Obviously, these are the strongest and weakest stocks of the day, and I look at charts and study the news and fundamentals of all of them to see which of them might be setting up for a continuation. I then set alerts at price levels on the stock that I want to be watching.
If the stock had some fantastic news which changes its fundamentals, I might look to join the breakout as this type of stock might run much further in the short run as investors re-rate their valuations of the company.
On the other hand, if the stock has excellent news and I like its prospects longer term, I might wait for a pullback to more reasonable levels in the short term if I think traders have gotten carried away. Sometimes algo’s might need to shake the tree to get rid of people who chased the stock at frothy levels. Making these types of distinctions on strong stocks is what separates great traders from the rest.
Relative Volume (Rvol)
I will also look at relative volume (Rvol). Rvol is the current volume divided by the average volume. The greater the Rvol, the greater the likelihood of a range expansion on a particular day in a stock. For example, if a stock has a Rvol of 7, it means that on this particular day, it is trading 7 times its average volume. This is likely due to some sort of news catalyst.
When a stock trades multiples of its average volume, its range or Average True Range (ATR) is likely to expand. For example, on a day with corporate earnings, a stock trading with an Rvol of 5 may often move 2 or 3 times its ATR. So, if a stock usually moves $3 on an average day, on a day with high Rvol it may move $6 to $9 from low to high. This is the type of volatility day traders love. And it helps swing traders like me find great stocks that I can stalk for potential opportunities in the days to come.
I also do a lot of research when preparing for and after the trading day. I do a lot of reading from financial publications, scan media such as Twitter, StockTwits, and Reddit to gauge market sentiment, which I will often fade if it is too one-sided. This also helps me to identify new trends or themes in the market. You see, often, certain sectors will get hot coming in and out of fashion as funds rotate throughout the market. Having 1000 eyes on the market is better than 2, which is why I make use of the trading community and the contacts I have developed throughout the years.
Corporate Earnings & Press Releases (PR’s)
Most importantly, I read corporate earnings reports, conference call transcripts, and Press Releases (PR’s) from the companies. The bulk of PR’s begin to trickle out at 7 am daily when the market is open, and they are put out every half an hour until the market opens at 9.30 am.
Being fast on the trigger in pre-market when vital news in a stock comes out is an important strategy many intra-day traders use. I keep up with as much news as I can to be as informed as I can be in the stocks I am looking to trade. Fundamentals play an essential part in my decision-making as well as technical patterns.
Scans & Strategies
Other scans I use on a consistent basis to find trade ideas include:
- New 52-week highs (stock price)
- New 52-week lows (stock price)
- New 52-week highs (implied volatility)
- New 52-week lows (implied volatility)
- Technical breakouts
- Technical breakdowns
- Big spikes in stock volume
- High option volume
- High put activity
- High call activity
- High open interest
- Price gainers
- Price losers
- Big increase in implied volatility
- Big decrease in implied volatility
- Companies about to report earnings
- Companies that have just reported earnings
- Companies about to declare a dividend
- Companies that have just gone ex-dividend
- Companies that have just announced a reorganization
- Companies that have just announced a merger
- Companies that have just announced an acquisition
- Companies that have just announced a divestiture
- Analysts’ new buy recommendations
- Analysts’ new sell recommendations
- Stocks with gap openings up
- Stocks with gap openings down
- Large put-to-call ratio
- Large call-to-put ratio
You could build an entire trading system out of any one of the conditions listed above.
You are only as good as the stocks you trade. Finding the stocks that can give you an opportunity is a vital part of a professional trader’s process. It takes a lot of time and hard work to sift through stocks to find the right ones that might set up for a great trade. As a minimum, I run through scans of the biggest percentage gainers and stocks with high Rvol to find the biggest moves daily. This gives me an understanding of the stocks with the highest interest among investors and any changes in company fundamentals. I also read financial news publications and check social media sentiment to keep abreast of all the latest themes and trends in the stock market.
Most importantly, I keep up to date with company news and corporate earnings reports to understand the fundamentals of the stocks I am looking to trade. On top of this, I also look at stocks making new 52-week highs and lows as well as options activity, among other things. There are many different ways to find opportunities in the market for all different types of traders; the main issue is to get past the learning curve and live to fight another day!