Filtering for Stocks That Are Ready to Move
Here are some tips that will help you select stocks that are ready to move. In short term stock trading, not all stocks have the same potential to move. If the stock price is too low, such as with penny stocks, you may find excessive volatility as well as low trade volume. When placing short term trades, low priced stocks can have unpredictable volatility. This can make them very difficult to trade.
Conversely, high priced stocks are also not likely to move very rapidly because of their high level of institutional ownership. At least they usually have good volume, which gives them the liquidity to be quite tradable. However, it is this same high volume that reduces the volatility, making it take longer for them to move a given percentage than lower priced stocks.
In the middle, between the penny stocks and the high priced stocks, you can find a sweet spot. There is a whole universe of stocks that move readily and have good, tradable swings on decent volume. This makes them quite tradable.
Although every trader has their own individual guidelines, we find that the following parameters are quite useful. Stocks that are ready to move should be priced between $5 and $20. Additionally, their daily trading volume should be between 100,000 and 2 million shares.
Sometimes stocks in this price range have a low enough trade volume that they can jump around quite a bit. If you can find significant support and resistance levels by studying the first few minutes of the morning move or the history of the last few days, you could place a sell limit just below a significant high. Also, you could set a buy stop just below a significant low. Sometimes, the market makers will take you up on your offers.
I've used this technique to get in on, or out off, a position with a better price than I would have been able to get if I had been manning the buy or sell button. Of course, this technique can work against you if the stock is suddenly in a mood for a good move right through your stop or limit price.
So go ahead and experiment with setting up the filters in your stock picking software and see what comes up. With some practice, you'll find many trade opportunities in the Goldilocks "just right" zone.
Doug Newberry is a Director at Investing Systems Inc., which markets and develops both software and systems useful for many different kinds of traders and long-term investors. You can learn more about filtering for stocks that are ready to move at Stock Picking.
