Stock Picking
the central principle is not "which stock you should pick", but it is "which stock with which strategy should you pick?"
The pre-market idea is to assemble a list of ~8-10 stocks in play (using a scanner), and read about them. Try to identify why they moved sharply in pre-trading. From that list, pick 2 or 3 and watch them closely.
Stock in play
- A stock with fresh and imminent news
- A stock that is up or down more than 2% before the market Open
- A stock that has unusual pre-market trading activity
- A stock that develops important intraday levels which we can trade off from
Examples of the fundamental catalysts for stocks that make them suitable for day trading include:
- Earnings reports
- Earnings warnings/pre-announcements
- Earnings surprises
- FDA approvals/disapprovals
- Mergers/acquisitions
- Alliances/partnerships/major product releases
- Major contract wins/losses
- Restructurings/layoffs/management changes
- Stock splits/buybacks/debt offerings
Stocks in Play can be found in two ways:
- Pre-market morning watchlist
- Real time intraday scans
Once a stock is "in play", it typically remains so for a few days after.
Be careful with the fact that the stocks of a single industry tend to move together. If all oil stocks are down one day, then the single oil stock you were looking at is not actually a stock in play.
Favor stocks of high volatility
It is not enough to want a stock that has high volatility, but we must want a stock that has predictable direction
When trading, you want to pick stocks that have relatively high liquidity (ie. trade volume)
- when we say relatively, we are talking about the volume levels in relation to "what's normal" for a single stock.
- If trading volume is not higher than normal, it means that the trading is being dominated by institutional traders and high frequency trading computers. Stay away from it.
The most important characteristic of high relative volume stocks is that these stocks trade independent of what their sector and the overall market are doing. When the market is weak, it means that the majority of stocks are selling off.
a benchmark would be to trade any stocks with less than an average daily volume of 500,000
Avoid stocks with a large short interest
do not trade stocks with an enormous short interest, nor with a daily volume likely to be less than 500,000 shares intraday. A high short interest indicates traders or investors think a stock’s price is likely to fall.
the challenge with high short interest is that these stocks are more prone to a short squeeze by bullish investors and traders. A short squeeze occurs when short sellers panic and are scrambling to return their borrowed shares, forcing prices to increase quickly and dangerously
Avoid Low-cap stocks
Low cap stocks have a low number of outstanding shares. This means a large demand can quickly move the price of the stock.
Low float stocks under $10 are often highly manipulated and difficult to trade, and therefore only very experienced and highly equipped retail traders should trade these stocks.
You generally cannot sell short low float stocks that cost less than $10. For short selling, you need to borrow shares from your broker, and it’s rare that a broker will lend you such volatile stocks.
- Even if you can find a way, shorting these stocks is incredibly risky.
Find Medium-cap stocks
medium float stocks are in the price range of $10-$100.
These stocks have medium floats of around 5 million to 500 million shares
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