We discussed in yesterday's article the 5 steps for creating a successful watch list. Today we will discuss in detail the first step: Knowing the characteristics of the best stocks to trade. Many traders lose because they have the wrong stocks on their watch list. They are watching the wrong stocks because they don't know what to look for.
As momentum traders, we want stocks that have a high probability of making a big move in a short period of time on our watch lists. There are 6 common traits all of the best stocks to trade have. You have to know these traits in order to compile a successful watch list. Here are 6 traits every single stock on your watch list should have:
Liquidity and High Relative Volume
Volume is a key component of the best stocks to trade. You want to be watching and trading stocks that are liquid enough to trade cleanly. Ideally, the stock is trading at least 1 million shares of average daily volume. You also want to see a stock trading on expanding, high relative volume. This is a sign more buyers or sellers are entering the market as the market starts to trend.
If a stock has made a big move in the past, it will likely do so again. You want to look at a stock’s daily chart and see if it has had large daily candle days in the past. This will tell you if it has the potential to make an explosive move or not. You don’t want to be trading stocks that have daily charts with no history of making large moves.
Clean Daily Chart
Stocks with explosive potential of no nearby areas of resistance to the left on their daily chart. If you are looking for stocks to short on your watch list, you don’t want to see areas of support to the left. When you don’t have nearby resistance or support levels, there is less reason for the stock to reverse once it begins an uptrend or downtrend.
You want to have TRENDING stocks on your watch list. This is simple to identify: Is the daily chart making higher highs and higher lows, or lower highs and lower lows? If the answer is a neither, it is a stock you shouldn’t put on your watch list. You will just get chopped up and lose money trading stocks with no obvious trend. An easy way to identify a stock’s trend is to see if it’s trading and holding over or under it’s daily moving averages.
The most explosive stocks have 100 million shares or less in their float, which is how many shares are available to trade for public investors. Always check a stock’s float before you trade it. You can find out a stock’s float on Yahoo Finance, finviz.com, or shortsqueeze.com. It is best to consult all 3 sources, as estimates can vary depending on the source you look at. You only need a rough approximation to trade off of. You can still get good moves on stocks with over 100 million shares in their float, but they are rarer.
Stocks that have the cleanest and most explosive moves tend to have some type of recent news catalyst. Quarterly earnings reports will often ignite strong moves in stocks and can provide great opportunities for day trades and swing trades. These reports are the best catalyst in my opinion. Before trading a stock, always check for any recent news catalysts to see what is behind the move
HYRE is an example with all of these characteristics, and why it is been on our watch list for the past couple weeks:
It has a low float, trading on high relative volume, has a nice range and uptrend, and a clean daily with no resistence levels to the left above $8. These are the kind of stocks you want to have on your watch list.
Now that you understand the characteristics of the most explosive stocks, you are ready to learn how to scan and find these stocks. Tomorrow's post we will discuss how to use scanners and screeners to find these stocks.
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Join us on Sunday and watch me build my trading watch list live. You will see in more detail how I execute these 5 steps, and get actionable advice on how you can build your own successful watch list.