I hate it when I buy calls in Google only to watch Facebook take off.
Picking the right stock isn’t always easy.
That’s why I put together a 3-step checklist on how to select symbols I want to trade.
You see, this simple process allows me to weed out thousands of stocks…
And narrow in on just the stocks that fit my criteria for a winning trade.
Want to know what it is?
You’ve probably heard this term thrown around a lot on CNBC or by a friend who wants to sound smart.
Admittedly, I thought it had something to do with a sink’s plumbing at one point.
Liquidity is synonymous with volume or ‘enough volume’ to make a market.
You see, for something to trade, there has to be buyers and sellers. Sometimes, you find tons of people lining up to do this on both sides (IE the SPY ETF). Some stocks, you’ll be lucky find more than a few trades a day.
In order for my trading to work, I need there to be other people to trade with. That means my ability to influence the market is virtually non-existent.
Think of it this way. Say stock ABC trades $10,000 a day and stock DEF trades $1,000,000,000 a day. The normal trading day is 6.5 hours. If I make a trade of $1,000, do you think I’d influence the price of either ABC or DEF?
DEF wouldn’t even notice me. However, since I’d be 10% of the total trade volume in ABC, chances are I’d move the stock price around, and be lucky to get filled at that.
Here’s the interesting thing – this also applies to options as well. The higher the volume on an option contract, the tighter the bid/ask spreads are.
That’s good for us as traders. When bid/ask spreads are wide, it favors the market makers.
So, to recap, I want a stock that trades enough volume that I wouldn’t make a dent, and similar action in the options.
Note: I can also gauge options volume through the open interest. There can be tons of options contracts, so low volume on the specific one I want isn’t always a bad thing.
2) Wide average true range
I’m a swing trader by nature. So, I need MOVEMENT in order to make money. Stocks that don’t jiggle around enough don’t tickle my fancy.
That’s why I use a technical indicator known as Average True Range (ATR). This gives me a rough estimate of the total potential range possible on a trade (within reason).
It basically averages out a set number of periods using the greater of the current day’s total range, the high of today to yesterday’s close, or the low of today to yesterday’s close.
Here’s an example with ROKU, which I traded a ton last year.
You can see how the ATR on this stock expanded during extremely volatile periods and contracted during calmer ones. However, it still gave a range of roughly $7-$10.
That means that on the extremes, the stock would move anywhere from 5%-10%. Ranges like that are what I want to see for my trades.
3) TPS Setup
Yes, I cannot go a newsletter without talking about my glorious TPS Setup.
So, what does a TPS setup involve?
- Trend – I prefer bullish trends. However, I just want one that’s obvious to the naked eye.
- Pattern – After a stock makes a hard push higher/lower, I want to see it make a consolidation pattern. This lets the stock rebalance and build energy for its next run higher.
- Squeeze – This is my timing indicator. When a pricing channel/range contracts long enough, it causes the Bollinger Bands to move inside the Keltner channel. That signals to me the stock is about to make an explosive move.
Do all of my trades have TPS setups?
But probably more than 90% do. I found it to be the easiest and simplest way to trade myself and teach others.
But rather than write about it, let me tell you about it.