Screening for suitable stocks

There are a few criteria I look for, and these are roughly them:

•     Liquidity
•     Better than the stock's own sector
•     Clean uptrend
•     Not overstretched on the daily chart

Liquidity

The importance of liquidity cannot be overstated, but I think the concept is misunderstood when it is taught to aspiring retail traders. The key thing here is to be able to build and unwind a position relatively quickly.

I prefer my orders to be far less than 1% of the daily trading volume of the stock. So if you are taking a 10,000 euro position, you should look for stocks that have an average daily dollar volume of at least 1,000,000 euros.

The area where I think educators mess up retail traders is when educators conflate their position sizes with those of a retail trader of a small account. For a wealthy full-time retailer, they may need a stock to trade a Euro volume of $500 million to meet their liquidity standards.

However, if your average position size is 100 euros, this is not really necessary, although I would still prefer to trade stocks that have a daily euro volume of at least one million euros, as liquidity can dry up quickly if things go badly.

Sector outperformance

In the same way that we compare a sector with its parent index, we compare a stock with the sector to which it belongs.

We want to trade leading stocks within leading sectors. This not only gives us the best chance of a successful trade, but also the best chance of an uncontrollable trend that can turn a 3-day swing trade into a month-long winning position if we want to hold it that long.

Clean uptrend

I prefer a trend in https://exnessthai.com/ to have a reduced daily range and volume on pullback days. One of the biggest red flags is when a stock drops with momentum, only to rise again with less volume.

This suggests that there are many weak hands ready to be liquidated as soon as sentiment changes.

Here is an example of a growth stock in an uptrend that slowly wears down on pullbacks and crashes again, the opposite of what I am looking for. 

Not overextended in the daily chart

When a stock's moves deviate significantly from its "mean" (whether it's a moving average, trading bands, etc.), a pullback becomes more likely, making it an unworthy candidate for a short-term swing trade.

This is a pronounced example of a situation where it should be avoided without a deep fundamental understanding of the catalyst. The stock is essentially in no man's land and is essentially a speculative vehicle for the corona virus.

Below is a better example of your typical overstretched daily chart. Remember, I am not applying hindsight bias here, I am not saying that the stock tanked due to over-extension.

The stock went down because the market went down, and the SPCE was the first example that came to mind when I talked about this concept. The point here is that when a stock is overstretched, the probability that it will continue to run in the short term decreases.

An overextended stock usually has candles with large ranges outside the trading ranges of your choice (I use Keltner channels with a 2.25 ATR multiplier). These stocks have many characteristics that reflect a trend top and I prefer not to be on the wrong side of one.