Finding Trading Opportunities – Crash Course

 

Date: 9/16/2022
Author: Chris Hood

 

 


How do you know which tickers to trade?

If I earned a dollar every time I answered this question, I’d probably just quit trading and retire on a private island.

There are thousands of stocks, ETFs, and ETNs to choose from.

They hail from different sectors and fall into a range of prices.

For example, consider the difference between Berkshire Hathaway (BRK.A), which closed Wednesday at $418.999.00 per share, and Dension Mines Corporation (DNN) at only $1.40.

So how are you supposed to decide?

Most traders use one of two methods to pick their trades. Obviously, many people, like me, mix these together.

Let’s look at the basic idea behind each method, and you can decide which seems better for you.

Ok, before we get too deep into this, we must address the price issue.

The first question should always be, “What ticker can I afford to trade?”

Think about your account size and remember the 1-3% rule. To manage risk, never put more than 1-3% of your account value into a single position.

For most traders, this will eliminate extremely high-priced equities.

Options allow much more affordable trades than the purchase of shares. But a long call or even a bull call debit spread on some tickers can be cost-prohibitive.

After you’ve identified which stocks are in your price range, there are two ways to build your watchlist.


Move Fast. Keep Winning.


The first method is to select a small set of tickers to trade and watch them daily for opportunities.

Each stock has a different personality you can come to know over time.

Its volatility, correlation to market movements (beta), and behavior around earnings tend to follow patterns. In fact, many institutional traders are tasked with trading only a single stock or index.

Their job is to learn as much as possible about it and trade using the fund’s system.

This insight helps plan better trades.

Many traders stick exclusively to the more liquid index ETFs such as SPY or QQQ, while others specialize specific sectors.

The second method is to utilize a screener to build out your watchlist.

Screeners are software tools that filter all the tradable stocks by whatever criteria you set. Your broker platform will likely have one built in, but you can always upgrade to a more powerful tool with a subscription.

Here’s how they work.

Using the free screener available on FinViz, I start with a list of 8510 tickers.

That’s a lot to choose from.

However, if my goal is to trade options only on US stocks under $50.00, I’ve reduced the list to 3515 choices.

Still too many.

Let’s assume I’m looking for a potential bullish breakout play.

To ensure enough liquidity, filter out stocks with a daily volume below 750K shares.

Now screen out anything with a price below its 200-day moving average, and find only descending triangle chart patterns.

I’m left with only 17 stocks.

Now I just analyze them to look for promising set-ups.

There are many different screening methods, so don’t just assume the criteria above will work for you.

It all depends on what you’re looking for and how you trade.

 

Cheers,
Chris Hood

 

 


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