It's no secret that the majority of traders are unprofitable over a long time frame. There are numerous reasons why this is the case including preventable amateur trading errors and the right method to find the most tradable stocks. But even some of the most experienced traders, they are hampered by a common mistake. Picking the wrong asset, they want to trade.
I hear lots of traders including some of my newer day trading students say, "I'm looking to be an SP500 futures trader" or "I want to master Apple stock." Unfortunately, strategies at this approach often lead to poor performance or outright losses. Simply because out of any given asset, trades are in a trendless, random manner approximately 70 percent 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 nowhere. This leads 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."
How To Find To Find The Most Tradable Stocks
In my intraday stock trading method that I teach at my firm Cyber Trading University. I've developed a system to screen for the stock that is most likely to trend rather than chop around and generate trading losses. My goal as a day trader teacher 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...
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, look for 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 a.m. Many of these big movers have had major earning releases, important news, or FDA approvals or rejections (In the case of biotech stocks). Important news makes for active trading and tradable intraday trends.
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.
Avoid Brand Name Stocks
This relates to the point. Avoid well-known stocks such as Apple or Intel 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 against. 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 in brand name stocks.
Avoid Stocks With Insufficient Trading Depth
I only trader 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.
Steer Clear Of Stocks With Low Trading Volumes
This takes the point above a step further. Only trade stocks that have a large enough trading volume so that trading is smooth instead of erratic. This is so you can enter and exit your trades as quickly as possible.
Here is the minimum trading volume 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
Avoid Stocks With Very High Trading Volumes
While I only trade stocks that have sufficient liquidity, 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 on a typical day.
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. 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.
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 Total View. 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).
I discuss even more about these methods, my approach to entries and exits, advanced NASDAQ TotalView and ECN Book, and much more in all my trading courses.
But by following these eight simple rules, you can significantly increase your chances of finding quality, and most tradable stocks each while reducing the risk of having losing trades.