Screening for Stocks with Better Odds of Success
Finding Winners & Still Having a Life
Screening for stocks is a core tool that should help you create a trading model that helps you focus, and not get get consumed by bad habits.
It’s taken a number of years for me to tune, experiment and personalize my trading experience – as you know, trading truly is a philosophical journey. What works for some, may be poison to others.
The truth is however, even if I gave my full strategy, screening process and risk criteria away, people would still lose money. There are thousands of good strategies out there but if they don’t align with your personality, it be like taking a job you hate just for the money. Good for a while but not a passion you will stick with through thick and thin.
Being 100% transparent, I only follow my own strategy about 80% of the time! (Which is still an achievement). If I did follow it all the time I would have an additional 0 on the end of my net worth, at least.
Trading is not as black and white as a finding high RS stocks, there is a ton of experiential knowledge required to find out what works, and what doesn’t. It is a nice start though to at least tune your eye into winning price patterns.
At the very least, it eliminates the worst stocks, which in itself is a valuable starting point.
To be clear on my screening criteria, many of them came from Mark Minvervini, Stan Weinstein and William O’Neill. I’ve added a few things here and there but you should invest in these books for sure if you want to trade growth stocks.
Screening for stocks does not Equate to Profit
Screening for stocks and building some basic logic into software will not make you a good trader. It will however prevent you from chasing broken and cheap stocks, and more importantly it will save you from yourself. This is probably the number 1 reason people continue to lose money in the market (and holding losses), “it can’t go lower bro“.
It does not mean however:
- All of the high quality candidates will work out
- You can buy indiscriminately because of great fundamentals
The market needs to ebb and flow to present these opportune buying moments. This further stacks the odds in your favor.
The Components of your Screener
I trade growth stocks primarily, or stocks that are on their way up, even big cyclical movements from time to time. Over the years I have invested in indexes (and still do monthly for my future kids) but for the most part, I really like to bet on fast growing, hyper expanding names with the following fundamental characteristic:
In a Definite Trend
This is a hard and fast rule and is super easy to program on Tc2000 (and most other platforms). If you haven’t heard the theory behind a trend, we can liken it to physics:
“An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force” – Issac Newton
The basic premise is that once a trend has begun, it makes sense to bet in it’s direction as opposed to against it, so always bet with the wind at your back. I use daily and weekly time frames for my trend screens but this depends on your trading style (I like longer bigger trends where I make money the less I trade). Day traders typically go to far smaller time intervals. I have day traded (profitably) for a short stint (3 months full time) – no thanks, and big respect to those who grind it out.
I follow Mark Minervini’s trend template, sometimes I change these parameters slightly but they are universal in nature. If the MA’s are fanning out, although a lagging indicator, it at least makes sense mathematically. The trend is truly “your friend“. By screening for stocks you can find ones that conform to the trend.
- Your stock must ALWAYS be over the 200 daily EMA, my personal preference is the 150 EMA – the only exception being IPO’s
- The 150 EMA must be on top of the 200 EMA
- The 50 EMA must be above the 150 EMA
- The 20 EMA should be over the 50 EMA but sometimes this can be limiting so I turn it on depending on the environment.
Example of a strong stock (TSLA) in a massive uptrend:
In the TSLA example this year we had a breakout that shifted all the MA’s over one another, TSLA proceeded to run up 200% in a number of weeks whilst maintaining this trend.
I used to trade all sorts of ‘strategies’ with very mixed results. Changing towards stocks in strong daily and weekly trends kept me away from failed breakouts. It also made sure when I had winners that they could keep on pushing higher.
No Dumpster Diving
Some other criteria I scan for when screening for stocks:
- No correction in the last 52 weeks > 50%
- Tracking above the 200 SMA for at least 2 months
- No stocks under $10 – I break this rule sometimes
- Stocks with increasing institutional ownership or sponsorship
- In a perfect world the stock should be within 25% of it’s 52 week high
The rationale behind this is simple. If stocks are being blown up and crashing 50%, moving below a statistically significant moving average and have no ‘big boys’ buying them, it decreases the odds of success.
That’s not to say you can’t find a 100x stock under $10 or even enter one below the 200 SMA. It does mean however that the likelihood is less. As I’ve mentioned in my article about gambling vs trading – the goal is to put every statistical chance of success in your favor.
It’s quite the same with cheap stocks. Typically, if you go to a clothing factory outlet – how often do you find bargain after bargain that fits, looks and feels great? Not often. Yet people will buy stocks that are beat to shit with their entire life savings because they are ‘cheap‘.
Cheap is a Relative Term
Cheap is a meaningless word in the market. What is cheap today could drop 99.9% and be cheaper tomorrow, I’ve fallen victim enough times to know (and I guarantee others will too, even after reading this).
Shop smart and pay for quality. Don’t let your ‘impulse buys’ drive your trading. If you keep making the same mistakes every time and expect that you will make money, you might, but the odds are you will lose even more.
Below is a classic ‘bargain’ stock. Since the COVID-19 pin popped our recent bull run, I would imagine there will be thousands piling into these ‘Bargain’ stocks:
Considering Liquidity while Screening for stocks
Liquidity is important to me for a few reasons:
- I have been stung a few times with poor spreads – it’s important to be able to get in and out at a good price
- Running of stops – low volume stocks or assets are easily manipulated. If you have a stop loss it can be run in a matter of minutes and stop you out at some horrible levels.
- If you misfire on a trade it is easy to get out
In one way if you have smaller trading capital, you are actually lucky. Trading like a hedge fund would limit you even further in selecting stocks as your capital could move the stock up or down.
My hard and fast rule is that I will not trade anything with sub 100k shares traded on each day. Upon further inspection of this in my trading journal, I noticed that most of my gap downs were in thinly traded stocks.
So there are a few different brands of ‘relative strength’ – as you can imagine, it’s all relative 🙂 – yes I am fun at parties.
Some people measure relative strength vs the S&P, and others use the proprietary ‘RS’ used by the O’Neill devotees which is pretty much the same as normal RS but done on a percentile basis and gives more weight to more recent months (or something to that effect).
I really like how you can see this line clearly plotted using Marketsmith – but don’t like how locked down Marketsmith can be and likewise the price tag. Luckily, the good people at TC2000 helped me work out the screener and if you sign up with them and refer me , I will send you the PDF. Screening for stocks is an evolution of learning and application of that knowledge over time to find the true winners.
The basics of relative strength are to buy the best and forget the rest. Simply put, you want to own the higher alpha names that are decoupled to the downside of the general market.
Having top strength, particularly during market pullbacks is a sign people are holding onto what’s good, and dumping what’s bad.
Specific RS Numbers
I won’t trade any stocks under an RS of 80, but preferably look for setups in the 85+ range.
I remember a call of mine with Mark Minervini. He told me that when he managed his own fund and employed a new traders they had some rules. His rules where simple, you can’t buy names below 90 RS your first year. If you can’t make money in high RS names then you may want to reconsider trading – powerful words.
Never buy into Oversupply
Another hard and fast rule is to never buy into stocks that have recently dumped 50% or more. It’s pretty simple. If something has tanked, people who bought at the bottom are going to periodically take profits on the way back up. That can lead to severe shakeouts and outright failures. There is also a likelihood that the stocks overall trend will be heading south.
The axiom of ‘Buy low and sell high’ is a load of shit. The real axiom should be ‘Buy high and sell higher’ – obviously there are exceptions to these rules, it is however imperative to think like a trader. Stocks you own should be heading into blue sky territory with you on board. Screening for stocks should take this into account.
I’m being cheeky with GE again here. It’s really important to see what happens when it hits up against moving averages and crashes back down. Many institutions are just waiting for an opportunity to jump out on these rallies. Also, sometimes at the bottom of these rallies the upward movement can be due to a short squeeze.
If you don’t know what a short squeeze is – a quick 2 mins below may be helpful:
The screening for stocks is one of many tools you need to trade successfully. The above screening tips I’ve written do not take fundamentals into consideration, I am saving this for another blog to avoid writing a book.
It is good to think about supply and demand in very simplistic terms:
If you go to a shop looking to buy clothes on sale – what do you typically find? Typically, sub-par items which nobody wanted and have been left for dead in the back of the store. On the other hand, the things we want typically cost more. The experience of buying lots of cheap items might give you short term excitement, but they are low quality so will not last.
The same goes for nice cars, hot girls, mansions and anything people WANT (demand). You need to have something that is getting popular but isn’t quite obvious yet to the main-steam. You also don’t want to build a Ferrari from scratch as it takes too long. Being efficient with your bets allows you to roll over your edge more frequently.
Stocks are the exact same. Investors want sales, growth, expanding margins and an emerging industry on which to latch onto. Typically, when the market starts heating up you can see themes, companies and technology forming clusters of strength in the economy.
Avoiding Volatile Stocks
People often forget that volatility goes both ways. If you are looking for a rush, hop on a roller-coaster or go to the casino. If you are looking to last in trading however, keep clear of violent movers. Although these stocks are temping, as a trader you need to think in terms of risk.
If a stock is creating wide swings or ‘ranges’ within the candlesticks, the chances are you will be stopped out – a lot. The emotional ride is also not fun. My personal gauge for this is how I feel minutes after I put on my trade. If a feeling of instant dread overwhelms me or excitement emerges before I place the trade – I take it straight off.
You Have Some Tools Now
The above screening criteria when simply laid out are very simple:
- Moving average X-over and expansion – each stacked on top of each other, namely the 150 over the 200 and the 50 over the 150. I use simple moving averages but some prefer exponential.
- Price at least $10 or higher.
- No corrections greater than 50% in 52 weeks
- No corrections greater than 25% since the 52 Week high
- Average daily volume higher than 300k
- Relative strength in the top percentile, in Marketsmith terms, 80 and above – I have my own custom script in TC2000 that ranks in the same way but not in percentile
- Expanding volume. This is not a screener but I use the 50MA to look for volume spikes.
Many trend traders or momentum type investors will keep tabs on similar items, it is of course imperative to understand (hint that I am saying this for the 1000th time) that screening does not produce winning stocks.
Making money trading involves buying the right amount at the right time with enough exposure to make money but not destroy your marriage if it all goes wrong. I have been asked more about screening than risk management which always concerns me. Even if you make big gains, holding them is another story.
I’ll make sure to elaborate on what this means in-depth, for the most part, it’s important to at least see the right stocks and train your eye to recognize the best quality setups.
If you are interested in my full screener setup, it can be shared on TC2000, get in touch. As an affiliate we can get a discount on new memberships and I am happy to share my screener criteria with you. Just click contact me on twitter or via email.