Friday, March 13, 2015

Best Practices in Trading: Screening for Success

It's important to think of overtrading as a compromise of our best trading.  Good trading is selective, putting risk on opportunities that have a positive expected value.  When we lose that selectivity, we not only court losing trades and periods in markets.  We also undercut our own judgment and compromise the basis for our success.

Today's best practice comes from reader Steve Ryan who describes his process for screening for promising stocks and trades for the day session.  Steve explains:

"My strategy is to find stocks that will move the most even during a choppy market day.  Therefore, stocks with news and momentum stocks are two groups I trade the most.

Moreover, I am also concerned about liquidity.  Primarily a day trader and a swing trader, I cannot afford to let the market makers eat away my profits.  Slippage and huge spread are two silent killers for short term traders.

Therefore I create a scan (using the free FINVIZ version) below to get the stocks I want to look for the next day.  The stocks must be:

*  Liquid, with an average volume traded per day of 1 million or more;
*  Volatile enough with average true range of 1.5 or higher;
*  Priced over $20
*  Price is above SMA 50 (for momentum up) OR below SMA 50 (for momentum down)
*  Simple moving average 20 is above SMA 50 (for momo up) or below SMA 50 (for momo down)

This scan usually returns anywhere between 150-210 stocks every night.  From there, I look at Daily, Hourly, 15 minute, and 5 minute charts to find the best stocks to trade the next day.

One can alter the average volume per day, the price threshold, or the ATR to get more stock results."

The best practice here is having a robust process for separating greater opportunity from lesser opportunity.  Once you filter potential trades based on screening and then further filter that list, you have helped avoid overtrading and focused yourself on the trades that are best for you.  Notice how Steve places both volatility/liquidity and trend in his favor in his screening, increasing the likelihood that he'll get the magnitude and direction of moves during the day session.

Further Reading:  Quant Resources for Discretionary Traders