There are thousands of stocks to choose from,
and day traders or swing traders can pick any stocks they want. However, the first step for a trader is to
figure out WHAT to trade. In today’s video I will share several tips
on how to select stocks for intraday and swing trading, in order to identify the best trading
opportunities. Your role as a trader or investor is to filter
through the noise of the markets and select the best setups. This may sound complicated, but the process
is painless once you know how to start. Every good scan starts with the proper scanning
criteria. First, let me start by saying that there is
no “perfect” scan, as all traders have different styles and strategies. This is my own way to pick stocks to trade,
for swing trading. That said, once you understand how these filters
work, you can begin creating your own scan, one that will work for you. So here are the filters I use. 1. The average daily volume (over the past 50
days) must be at least 1 million shares traded. There are several reasons why the daily average
volume is the primary factor in my stock-selection process. The first is liquidity. Your stock must have sufficient intra-day
trading volume. Any stock that is trading under 1 million
shares per day can be easily manipulated by market makers (MMs), and they usually trade
very slowly. Think about it this way: do you really want
to be trading a stock that Wall Street obviously wants nothing to do with? Remember low volume means low interest in
the company. A low-volume-traded stock simply means it’s
not worth trading. Low volume stocks tend to be extremely speculative
and unpredictable. Because there is such a limited number of
shares, a large purchase by a mutual fund or another big investor can cause a huge spike
in the price. Or, if the investor decides to sell, the share
price will likely tank. Neither scenario is ideal for us, small players. That's why I avoid stocks that trade fewer
than 1 million shares per day, based on a 50-day average. 2. The stock price must be minimum $50
Both volume and price are key factors that help fuel big moves in stocks. I personally tend avoid penny stocks and prefer
to stick with stocks that are priced over $50. The triple-digit stocks are even more suitable
for day trading and swing trading. Why? Because the stocks in this price range are
the most highly traded stocks, but also have the largest volatility. One of the most consistent mistakes a significant
number of beginner and inexperienced traders make is to be drawn to penny stocks. Consider penny stocks as any instrument that
trades for less than $5.00 per share. At first glance, penny stocks may seem appealing
because they tend to fluctuate tremendously in price, in very short periods of time. In theory, you could generate a very high
return quickly. Unlike stocks over $50, which enjoy deep liquidity,
some of these companies might not have any buyers or sellers for days at a time. If you were to build a position at $1, then
go to sell it at $2 when, there might not be any buyers. You could put in a sell order, and it would
just sit there, day after day, doing nothing. That’s why I recommend avoid penny stocks,
especially if you are a beginner, and stick with stocks that are priced over 50$. They will have consistent volumes, consistent
liquidity, and most importantly, are consistently traded by Wall Street. 3. Use the ATR to assess volatility Another important factor you should analyze
before entering the market is the daily trading range. Some stocks exhibit a relatively small trading
range which makes them not suitable for day trading. A stock goes through different cycles and
every period of low trading ranges at one point will be followed by an expansion period. So if today your favorite day trading stock
has a low ATR, maybe it’s best to simply wait for another day to enter the market when
the trading conditions are more favorable. As a day trader, the ideal periods to enter
the market is when the ATR shows expansion periods in the daily range. Let me show you a simple way to determine
if a significant range expansion is taking place. Based on my backtesting result, the ATR reading
will signal a significant increase in the range once it breaks above the 100-day EMA. Simply attach the 100-day moving average on
the ATR indicator. In this way, you’ll easily see if the average
intraday price swings are sufficient to trade. For better and faster results, you want a
chart pattern that is consistently fluctuating intra-day. Your stock should be moving, for you to book
some profits. 4. The average daily range is another great metric
for measuring volatility. Traders want to find stocks that have a high
price range, making for more trading opportunities. The idea behind the average daily range is
that each market has its own “personality” when it comes to how far it travels in a single
day. The daily range is calculated by taking the
difference between the stock’s daily high and daily low. You want that number to be high. For example, if a stock is stuck in a $0.50
range every day, it would be difficult to place profitable trades (without large sums
of money). On the other hand, a stock trading in a $5
daily range would provide plenty of opportunities. So, a correct analysis of volatility is an
extremely important element when choosing which stocks to trade. 5. Narrow Spreads Stocks Like any marketplace, there are two sides
to every trade: a buyer and a seller. A buyer submits a bid, which is the highest
price they're willing to pay for a stock, while a seller submits an ask, which is the
lowest price they're willing to accept. The difference between the bid and the ask
is called the spread. Beginner traders usually don’t pay too much
attention to how the difference between the bid and the ask of a stock affects their profit. Large stock spreads can damage your profit
potential, that’s why you need to choose stocks that have narrow spreads. The spread is a byproduct of the daily trading
volume. Naturally, stocks with large volume will positively
influence the spread. More liquid stocks — those that trade more
often in higher volumes — will have a narrower spread. Low volume stocks can exhibit very wide spreads
that have the capacity to wipe out the profit potential. So, before going long on a stock, always make
sure the difference between the bid price and the ask price is narrow. With the volatility in the stock market, the
last thing you want is high fees cutting into your gains. 6. There must be no current news headlines that
affect the stock. If your stock is constantly in the news headlines
due to a major economic issue taking place, then don’t trade it. Wait it out. Stocks that are constantly affected by the
news tend to be highly volatile, and they tend to have very unpredictable charting patterns. If you are a beginner, don’t try to anticipate
the market reaction to big events, I can tell you from personal experience that the market
often does exactly the opposite of what you’d think it SHOULD do. As a beginner, you’re supposed to be avoiding
the noise. You can very easily get sidetracked and stumped
by the news that are currently affecting your stock intra-day. Of course, you cannot completely avoid the
news as a trader, but you just have to learn how to “navigate around” the news which
is usually much easier than trying to directly get involved into news trading. 7. EARNINGS PER SHARE GROWTH
To asses your chances of picking a good stock to trade, I like to take a close look at its
fundamentals, especially its earnings-per-share growth. If you day trade, you could skip this, but
if you are a swing trader like me, and prefer to go long on stocks, earnings-per-share growth
represents an important number. So, to find good stocks to go long, seek outstanding
profit performance. You can easily calculate earnings per share. Simply divide a company's net income by its
number of shares outstanding. Specifically, stocks with earnings-per-share
growth rates of at least 20% compared with the previous year suggest a company has products
or services in strong demand. It's even better if the earnings-per-share
growth rate has been accelerating in recent quarters and years. Strong earnings growth is essential to a stock's
success and has the greatest impact on its future price performance. 8. Day Highs and Lows
When a stock makes a major move up or down following a period of consolidation, it’s
called a breakout. Breakouts are prime opportunities for traders
because a stock has the potential not only to make a big move in a short period, but
also to continue that directional move by gaining momentum. Incorporating day highs and day lows into
your scanning process can help you find stocks that are breaking out. For example, if you want to find shorter-term
breakouts, you may look for stocks that are trading above their 30-day highs. For a medium-term breakout, you may analyze
stocks that are trading above their 90-day highs. Or you can look for stocks that have reached
their 52-week highs. 9. 200 moving average on the daily chart
The 200 moving average is widely used by traders because it is seen as a good indicator of
the long term trend in the market. If price is consistently trading above the
200 moving average, this can be viewed as an upward trending market. Markets trading below the 200 moving average
are seen to be in a downtrend. One of the easiest scans to incorporate with
the 200 moving average is to view the market in relation to this line. Traders commonly do this to analyze the general
market trend and then look to only place trades in the direction of the long-term trend. 10. There must be no stocks affected by frequent
government regulations. If the stock is affected by government regulations
or approvals—I do not trade it. Great examples of stocks that usually are
very risky to trade are biotech stocks and military defense stocks. These stocks tend to move even 50 percent
in one single day when the news hits the wire (good or bad news), whether it be the FDA
approving or declining a new product, for example. You never want to deal with this kind of volatility
and uncertainty, especially if you’re just getting started. If you learned something new and found value,
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