It’s no secret that most traders are unprofitable over a longer time frame. There are numerous reasons why this is the case, including preventable amateur trading errors, but even some of the most experienced traders are hampered by a common mistake: picking the wrong assets to trade. Most traders approach trading in a manner where they are deciding in advance what asset they want to trade, i.e. “I’m looking to be an SP500 futures trader” or “I want to master Apple Inc. (AAPL) stock.” Unfortunately, this is an approach that often leads to poor performance or outright losses simply because nearly all given assets trade in a trendless, random manner approximately 70% of the time.
When a trader sets out to trade a specific asset ahead of time, whether it’s crude oil futures or a Nasdaq tech stock, there is a 7 out of 10 chance that it will go absolutely nowhere, leading to “whipsaw” moves and racking up commission costs. While these losses may be small, they are frequent, and lead to “death by a thousand cuts.”
In my own intraday stock trading method that I teach at my firm Cyber Trading University, I’ve developed a system to screen for the stocks that are most likely to trend rather than chop around and generate trading losses. My goal is to improve the “signal-to-noise ratio” in the stocks that I trade.
Here are the eight rules that I use to find the very best stocks to trade each day:
1) Only Trade Trending Stocks
If you want to avoid getting caught up in the trendless, random chop that consumes most assets on a day-to-day basis, you have to find stocks that have a high probability of making a large move on the very day that you plan to trade them. The way to do this is by finding stocks that have already made a large move. What’s the logic behind this? Stocks that have already made a large intraday move early in the day are likely to have more momentum left in them that you can profitably ride.
To find these stocks, I look for the Nasdaq’s largest percentage gainers and losers in pre-market trading. Most direct-access brokerage platforms offer screening tools so that you can find these big movers. A stock that has made a large move in pre-market trading is likely to trend strongly after the market opens at 9:30 am. Many of these big movers have had major earnings releases, important news, or FDA approvals or rejections (in the case of biotech stocks). Important news makes for active trading and tradable intraday trends.
2) Stay Away from Stocks that are Over $30 Per Share
I avoid pricier stocks because they tend to belong to larger companies that are less volatile, which means that their trends aren’t as profitable. For example, a small biotech stock is likely to make larger moves on average compared to blue-chip stocks such as Microsoft.
3) Avoid Brand Name Stocks
This relates to the point above. I avoid well-known stocks such as Apple or Intel Corp. (INTC) because they are dominated by highly-skilled professional traders from renowned institutions such as Goldman Sachs and JP Morgan, which makes it harder for independent traders to compete. These institutions pay less attention to smaller stocks because they are more difficult to move large amounts of capital in and out of. This fact allows skilled independent traders to have a better “edge” than they can with brand name stocks.
4) Avoid Stocks with Insufficient Trading Depth
Though I only trade smaller stocks that I have an edge in, I also avoid stocks that are too thinly-traded or illiquid, as they typically trade in an erratic manner that can lead to sudden trading losses. I check the Nasdaq Level II book for each stock to make sure that there are a decent number of market makers or ECNs on both the bid and ask sides of the book just above and below the current stock price. Furthermore, I want to see at least a few hundred shares offered by each major market maker or ECN at each of the key price levels above and below the current stock price.
5) Steer Clear of Stocks with Low Trading Volumes
This takes the point above a step further. I only trade stocks that have a large enough trading volume so that trading is smooth instead of erratic, and so I can enter and exit my trades as quickly as possible.
Here are the minimum trading volumes that I look for:
- 15,000 shares by 9:15 a.m. EST
- 250,000 shares by 11:00 a.m. EST
- 500,000 shares by 2:00 p.m. EST
6) Avoid Stocks with Very High Trading Volumes
While I only trade stocks that have sufficient liquidity, I also avoid stocks with very high trading volumes because they tend to belong to the larger, brand name companies that I discussed earlier. In general, I avoid stocks that are included in the Nasdaq 100 index and/or trade over 25,000,000 shares in a typical day.
7) Be Wary of Stocks with Large Bid-ask Spreads
This is another way to filter out thin and illiquid stocks that are likely to make erratic moves. I prefer to trade stocks that have a maximum bid-ask spread of $0.06, but stocks with spreads of $0.02 to $0.04 are even better.
8) Watch Out for Market Maker Traps
Be mindful when trading stocks that have a strong imbalance between market makers and ECNs on either the bid or ask side of the Nasdaq Level II book. For example, if there are many more shares being offered than bid, the stock likely has a bearish bias, so think twice before buying it as a day-trade (and vice versa).
By following these eight simple rules, you can significantly increase your chances of finding quality, strong-trending stocks each day while reducing the risk of having losing trades. I discuss these methods, my approach to entries and exits, advanced Nasdaq Level II and Totalview reading, and much more in all of my trading courses.