Here’s a question I received on identifying good trading opportunities.
what troubles me the most is finding the right stock,etf,future,index or whatever to trade. I know the rules, when to enter, when to exit, position sizing etc. But now the real problem comes, what to trade. I think this is the problem most new traders face. Some find stocks to trade on forums, some go with big namest, other with indexes,.. Can you give me a clue what to search for? Do you have any screener which gives you candidates? I know of MSN deluxe screener but there are sooo many parameters so I dont know which to choose. Do I search for new 52 week highs, high volume, something else? I know some trade breakouts, flag formations, pennants, but how do you search for those visual patterns. I surely cannot go and open 9000 stocks to see which form some formation. So I would be very thankfull if you could provide me some guide to finding the right stock to trade specialy now that most stocks are getting down,..
This is, of course, not a straightforward question. How you reduce the universe of tradable instruments down starts first with your trading focus. Since this individual has spoken about stocks, I will assume that he’s made the determination that stocks are the best market for him. Obviously, different people will select one market or another to suit their own needs.
Beyond the market, it’s also important to have a very specific idea of your trading timeframe. How long do you plan on holding your positions? Is it hours or even minutes? Is it days or weeks, or even months? Whatever process you use to pick out good trade candidates has to take that into account.
Now let’s assume we’re talking a days to weeks type of holding period. That generally means using daily data for trade identification purposes. Are you looking to be a trend trader? Or do you want to trade ranges? They require different scanning processes since the set-ups are very different.
Do you see how the question isn’t a simple one?
I haven’t even gotten into the question of basing your screening process on the requirements of your trading methodology. And are you looking for stocks which are more volatile or less volatile?
Of course there is the option of just selecting a specific group of stocks which is large enough to generate regular trading opportunities, but small enough to not be onerous in terms of looking for those good trades. That could be based on fundamentals, or sectors, or volatility, any number of things. In my job we keep a list of 200 stocks that tend to be aggressive movers on a daily basis which is based on ranges and volume.
The whole scanning and screening process is one critical to part-time traders especially.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
** See John’s full bio.
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