Stock Selection Made Easy

Knowing what to trade is essential. So, stock selection is key in preparing every proven to be successful strategy.

Every trader focuses his/her job within a specific perimeter. A lot of day traders love forex, futures or commodities, just to mention some of the most traded securities. Here at Warrior Trading we focus on day trading regular stocks listed into the New York Stock Exchange (NYSE).

The trading technique that I use avoids trading funds, index or commodities because of low short term volatility, as well as penny stocks (stocks below $1 price, which are too risky with respect to reward). Instead, it is based upon stocks that meet specific setup requirements.

It’s imperative to know that stock selection is the second level of risk management. Awareness of a stock’s history and background is important in order to pick the right stock at the right time. In fact, in 2010 over half (nearly 60%) of the total transactions were made by High Frequency Trading (HFT) algorithms. Those are automated trades made by computers. Trying to play against them would be nearly impossible, such as playing chess against a computer. Therefore, retail traders should focus where HFT are weaker which is finding patterns.

There are many possibilities for selecting the most promising stocks in the market. A well-established technique is trading the extremes. Trading the “big days” where selected stocks are experiencing a very high level of interest among retail traders can be a good practice. This usually happens occasionally for each stock: the goal is to be able to read the correct pattern before the big move takes place.

Here are the most useful indicators to consider in pre-market for the purpose of identifying stocks that are worth to day trade:

  • High Relative Volume (HRV): stocks that are trading at least 1.5 times their average volume (3 times would be best) as a result of a catalyst (mostly news or earnings). On the other hand, I tend to avoid trading overcrowded stocks that already have more than 1million shares traded during pre-market. This is because the most promising setups occur when trading fresh breakouts;
  • Focus on the gap: stocks with a big difference between the previous day closure price and current day opening price (usually at least +/- 4%);
  • Low float: the fewer the shares available on the market, the better. This will increase the capability for bigger moves in shorter time frames. It’s preferable to choose stocks with less than 100 million float, ideally lower than 20 million;
  • Short percentage: indicates how much percentage of shares are currently being shorted by other traders. The higher it is, the better it looks for long biased traders like myself.

Since a very high level of accuracy is required for consistently successful trading, the usage of the best stocks scanning tool is imperative, especially for being able to catch opportunities in real-time also after the market opens. As many of you may already know, Trade Ideas is the number one choice to accomplish this specific task.

See you in chat-room.

Trade safe,

Roberto Barbaro