One of the most effective methods you can use to generate trade ideas is the use of screeners. If you select your criteria properly it is easy to generate lists of tickers that meet the criteria of the trade thesis you are looking to execute. This allows you to look through 50-60 charts instead of hundreds to generate a specific trading idea.
The purpose of a screener is to generate ideas that will allow you to trade a certain plan. The first step is coming up with a trade thesis – what kind of a trade are you looking for? A day trade, a swing trade, a long term play, a macro play… etc. By having a specific kind of trade in mind you can then tailor your screener to the criteria you believe to give you a edge in finding the optimal setups (i.e. forward P/E, P/E, debt/equity for longer term plays, key resistance levels for day trades, accumulation for swing plays… etc). Of course to do this the first step is familiarizing yourself with all the choices available on the screener and what they mean to the ticker in question (investopedia is very useful for explaining criteria you may not be familiar with).
Once you have determined the criteria you want to use then your next step is to determine which are fixed and which are variable. For example when screening for value you may insist on P/E < x but are flexible on average volume or market cap. By having some flexible variables you can narrow your screen down to a more manageable number of tickers (personally I will try to generate 50-150 tickers per screen just to limit the amount of charts I have to look at). If you are generating too many tickers then your screen is unlikely to give you a real edge in finding actionable setups.
Finally you have to look through the charts and/or financials of the tickers you have generated to figure out which ones fit what you are looking for and more importantly the risk/reward that you want for your trade. It is important to remember than an idea is an idea, and while it may be brilliant only price action will pay – its really just letters and numbers anyways that have little bearing on the underlying company. The trick is not to be consistently right, but to be flexible and trade what the market gives you. In the words of Mark Cuban: “Ideas are like assholes, everyone has them” so do yourself the favor of assessing yours as objectively as possible and admit when you are wrong – if you cannot do that you have no business investing.
Next, I thought I’d share on of my favorite screens on a free screener and the thought process behind it. I use this screener to generate actionable swing trading setups where once triggered my hold time is anywhere from one to ten days – although I try to avoid holding swing trades over the weekend as a rule of thumb. I will explain my thought process behind the criteria I have selected.
1) Market Cap > $2bn – Smaller companies generally don’t trade options and if they do the spread on the bid/ask is too broad and volume isn’t high enough on the options.
2) Price > $15 – Same reasoning as market cap, and with smaller companies playing options is akin to picking up nickels in front of a bulldozer.
3) Average volume > 1m – Thicker stocks tend to have more interest in options and also are less prone to price manipulation than less liquid ones (not to say that they are immune).
4) Beta > 2 – The stock tends to move rapidly when it does move.
5) Average true range 14 < 1 – Over the last 14 days the stock hasn’t moved very much.
When you combine these criteria what you generate is a list of mid to large cap companies that tend to move rather rapidly, but over the last 14 days haven’t been moving (consolidating). Obviously it isn’t perfect, but is a good starting point for going through charts. My favorite picks are ones that show up on multiple screens, and personally the most effective ones have shown up on this screen, my seasonality screen and my short squeeze screen as well as fitting with a macro view (inflation, commodities, ag, industrial recovery… etc). As a note, I generally don’t care about fundamentals as only price action pays and the market can always remain irrational longer than you can remain solvent.
Hopefully you now have a starting point for developing your own screeners. I may post this as a series detailing some other screens I use and criteria I have found to be useful/useless.