Stock Scanning Secrets of Professional Traders
"Opportunity knocks once, but preparation knocks every day." - Alfred Nobel.
The quote by Alfred Nobel rings more accurate than ever for intraday trading. While chance encounters might bring you some gains in trading, consistent success demands meticulous preparation.
And no tool holds more power for the intraday trader than the Market Screener to achieve this.
Although you may know How To Use a Stock Screener For Day Trading, This blog will specifically cover the trading strategies used by professional traders while using stock screeners. We'll break down the essential filters like Liquidity, Volatility, and fundamentals, showing you how to combine them like a seasoned trader.
Here's how standard intraday trading filters work in a stock screener.
1. Identifying Opportunities Using Liquidity Filters:
Liquidity is the most critical factor in day trading as it can ensure smooth entry and exit, minimize the price impact, and fuel your trading with confidence.
What is a Liquidity Filter?
A liquidity Filter is a criterion or set of standards used by traders and investors to assess the level of Liquidity in a financial instrument, such as a stock or other tradable asset. Liquidity refers to the ease with which an asset can be bought or sold in the market without causing a significant impact on its price.
A liquidity filter aims to identify assets with sufficient trading activity and market depth to facilitate smooth and efficient transactions.
Because,
For Intraday trading, You don't want any stock; You need the smooth operators, the ones you can buy and sell in a flash without causing a price tsunami!
A liquidity filter allows you to do this exactly,
The risk of your buy or sell orders being executed at significantly different prices (The execution slippage) than intended is minimized By using Liquidity filters, protecting your profits.
Entering and exiting positions also becomes faster and more efficient, allowing you to capitalize on fleeting intraday opportunities.
High Liquidity also allows you to adjust your position size dynamically and swiftly exit trades if needed, limiting potential losses.
Ordinary liquidity filters include:
- Average Daily Volume (ADV): This measures the average number of daily shares traded. This filter can identify stocks with consistently high trading volume, indicating strong market interest and easier entry and exit points. Seasoned Intraday traders generally aim for stocks with ADVs exceeding 5 times their average trade size. They may also opt for A high ADV (e.g., over 1 million), indicating active trading and more effortless execution.
- Market Capitalization (Market Cap): Larger-cap stocks (over $10 billion) tend to be more liquid than smaller-cap stocks. Intraday traders generally choose stocks with moderate to large market caps (e.g. >$1 billion) for smoother price action and less susceptibility to manipulation. However, the decision for filtering for stocks within a specific market cap range is based on your desired level of Volatility and potential returns.
- % Change in Volume: Intraday traders Look for stocks with a significant increase in volume compared to their average, potentially signaling a breakout or trend formation.
- Order Book Depth: This shows the current buy and sell orders at different price levels. Deeper order books (more orders on both sides) suggest higher Liquidity and a lower chance of impacting the price with your trades.
- Bid-Ask Spread: This is the difference between the highest price buyers are willing to pay (bid) and the lowest price sellers are willing to accept (ask). A low spread indicates tighter Liquidity and more effortless execution.
Imran Haider
How to Apply Liquidity Filters for Intraday Opportunities:
But First Up, A gentle reminder!
The mechanism explained below is one of the many ways intra-day traders apply liquidity filters to their advantage. The objective is to give you an idea of using these filters according to your trading strategies.
So,
To Apply a Liquidity filter,
You Start by filtering for stocks with an ADV exceeding a minimum threshold based on your trading style. For scalping, you may prefer higher Liquidity (e.g., ADV above 5 million), while swing trading might tolerate slightly lower ADV (e.g., above 1 million).
But there is also one problem,
High Liquidity alone only guarantees intraday opportunities if the price action is there. So traders combine it with volatility filters like Average True Range (ATR) or Beta (explained below) to identify stocks with Liquidity and suitable price movement potential.
The strategy ensures that selected stocks have the necessary Liquidity for quick transactions and exhibit the desired level of price movement that is conducive to intraday trading strategies. The stocks filtered by this mechanism will be the stocks that may offer substantial trading opportunities for intraday traders.
Another aspect you can also look at when dealing with liquidity filters is ;
Not to Overlook Smaller Caps.
While less liquid, smaller-cap stocks can also offer higher potential returns.
It would help to look for stocks with sufficient immediate Liquidity for your intra-day needs. One way to find such stocks is to use order book depth. You Look for smaller-cap stocks with a reasonable order book depth. This may give you an active market with numerous buyers and sellers at various price levels.
For intraday trading, minimizing bid-ask spread is also crucial as it directly impacts the cost of entering and exiting positions. Identifying smaller-cap stocks with relatively narrow bid-ask spreads signifies a more liquid market, making it easier for traders to execute trades at desired prices.
2. Identifying Opportunities Using Volatility Filters:
While price fluctuations offer abundant opportunities for intraday trading, excessive Volatility can turn profits into losses in a blink. This is where Volatility filters step in, guiding you towards stocks with price movements aligned with your trading style and risk tolerance. A Recipe to Improve your trading performance.
What are Volatility Filters?
These filters allow you to narrow down your stock based on price fluctuations. By understanding these filters, you can choose stocks that exhibit the level of Volatility you're comfortable with and capitalize on predictable price movements. This can limit your exposure to sudden price swings and protect your capital.
Volatility filters help you identify predictable price movement patterns, allowing you to enter and exit trades at opportune moments.
Common volatility filters include:
- Beta: This measures a stock's Volatility relative to the overall market. A beta of 1 indicates the stock moves in line with the market, while a beta of 2 means it's twice as volatile. Intraday traders generally opt for stocks with moderate Betas (0.5-1.5) for balanced risk-reward potential. However, you have to filter for stocks within your desired beta range to manage risk and align with your trading strategy.
- Average True Range (ATR) measures a stock's average daily price range. A high ATR indicates high Volatility, while a low ATR suggests a more stable price movement. Choose your filter based on your preferred price action level and risk tolerance.
- Bollinger Bands: These bands show the typical price range of a stock over a rolling period. Breaches above or below the bands can signal increased Volatility and potential trend changes. Intraday traders filter for stocks exhibiting Bollinger Band breakouts or contractions to identify potential trading opportunities.
How to Apply Volatility Filters for Intraday Opportunities:
Again, this is for illustrative purposes only, as there can be many ways to filter stocks based on Volatility!
You prefer low-risk, trend-following strategies. You start with a filter for stocks with a beta close to 1. For higher-risk, momentum-based trading, you can consider stocks with a beta slightly above 1.
As with Liquidity filters, Volatility alone doesn't guarantee profitable opportunities. You must ensure sufficient Liquidity is available for the stocks by combining your volatility filters with ADV, market cap, order book depth filters or other suitable liquidity filters.
Once done, you may filter for stocks with an ATR within your desired range. Lower ATRs (e.g., less than 1%) might be preferable for short-term scalping, while swing trading can tolerate slightly higher ATRs.
You may also want to Identify Stock with Breakouts.
You can use Bollinger Bands breakouts as potential entry points for stocks you've identified through other filters—conversely, filter for stocks nearing the bands to capitalize on mean reversion strategies potentially.
By applying these filters, let's see what kind of stock a trader gets.
By applying the above filters, a trader may be able to identify Stock X, which has a beta close to 1, a robust liquidity profile (high ADV and order book depth), a lower ATR suitable for short-term scalping, and is exhibiting signs of a potential breakout on the Bollinger Bands during a historically low volatility period.
This is how an intra-day trader may execute an intraday strategy based on these filters, entering and exiting positions based on the identified breakout points and capitalizing on the anticipated price movements.
3. Identifying Opportunities Using Technical Filters:
Technical filters help reveal patterns, trends, and potential opportunities within the seemingly random movements of a stock's price. Understanding and applying these filters can unlock a wealth of information to guide your trading decisions.
What are Technical Filters?
These filters utilize mathematical formulas and indicators to analyze past price data and identify potential future price movements. Focusing on various aspects of a stock's price and volume offers valuable insights into trend direction, momentum, overbought/oversold conditions, and potential support/resistance levels.
Technical Filters can also help you spot trends early and capitalize on them before the masses catch on. They can help you identify potential support/resistance levels and overbought/oversold conditions, allowing you to set stop-loss orders and manage your risk effectively.
Common technical filters include:
- Moving Averages (MAs): These smooth out price data to identify trends and potential support/resistance levels. Different MAs like Simple Moving Average (SMA), Exponential Moving Average (EMA), and Moving Average Convergence Divergence (MACD) provide varying information depending on your needs. Intra-day traders focus on short-term moving averages (SMAs) like the 50-day SMA for trend direction and longer-term ones (LMAs) like the 200-day SMA for support and resistance levels.
- Bollinger Bands: These bands show the typical price range of a stock over a rolling period. Breaches above or below the bands can signal increased Volatility and potential breakouts.
- Fibonacci Retracements: These levels identify potential support and resistance zones based on retracements of previous price swings.
- Stochastic Oscillator: This measures the closing price relative to the price range over a specific period, identifying potentially overbought/oversold conditions.
How to Apply Technical Filters for Intraday Opportunities:
To apply the technical filters for your day trading decisions, you first have to
You can use Moving Averages to confirm existing trends and predict their continuation. You can also filter for stocks crossing above or below MAs based on your buy/sell strategy.
Once the trend is confirmed, you may want to
Gauge its Momentum.
You can use a Stochastic Oscillator or Bollinger Bands to identify stocks nearing overbought/oversold zones, potentially signaling trend reversals or continuations.
You may also
Want to Pinpoint Breakouts?
You can use Bollinger Band breakouts or Fibonacci retracement levels to identify potential entry points for stocks showing strong momentum.
Let's walk through a practical example of a trader applying the provided technical filters to identify an intraday trading opportunity:
Consider a trader who uses a combination of short-term and long-term MAs to identify trends. As a result, Stock Y is identified, with its 10-day MA crossing above the 50-day MA, indicating a potential uptrend.
To gauge momentum, the trader checks the Stochastic Oscillator of Stock Y, which indicates that it is approaching overbought territory, suggesting potential overvaluation.
The trader also employs Bollinger Bands to identify potential entry points. Stock Y is currently trading near the upper Bollinger Band, indicating strong momentum and a potential breakout.
Did you notice that recognizing the importance of not relying on a single filter, the trader combines MAs, Stochastic Oscillator, and Bollinger Bands?
This comprehensive approach confirms the potential uptrend (MAs), warns of overbought conditions (Stochastic Oscillator) and signals a breakout (Bollinger Bands). As a result, a perfect opportunity for intra-day trade is recognized.
4. Identifying Opportunities Using Fundamental Filters:
While technical filters thrive on price movements, fundamental filters offer a different perspective, guiding you toward stocks with strong company fundamentals.
What are Fundamental Filters?
These filters focus on a company's financial health, growth prospects, and competitive advantages. By employing these filters and looking beyond the immediate price action, you may discover undervalued stocks with significant long-term potential. By analyzing key metrics, you can gain valuable insights into a stock's long-term potential and make informed trading decisions,
Strong fundamentals can also buffer against short-term market fluctuations, potentially smoothing your intraday trading experience.
Common fundamental filters include:
- Earnings per Share (EPS): This measures a company's profitability per share. Seasoned intraday traders look for stocks with consistent or increasing EPS or recent positive EPS surprises to capitalize on positive market sentiment.
- Price-to-Earnings Ratio (P/E): A stock's price is compared to earnings. A low P/E might suggest a potentially undervalued stock, while a high P/E could indicate overvaluation. You may choose your filter based on your value investing approach or willingness to pay a premium for growth potential.
- Debt-to-Equity Ratio (D/E): This measures a company's financial leverage. Lower D/E ratios indicate financial stability, while higher ratios suggest increased risk. Traders Filter for stocks with D/E ratios within their preferred risk tolerance range.
- Revenue Growth: Analyze a company's historical and projected revenue growth rates. Intraday traders may look for stocks with strong and consistent growth to ride the momentum of expanding business operations.
- Market Share: Consider filtering for stocks with leading or growing market share within their respective industries. This can indicate strong competitive advantages and potential for continued success.
How to Apply Fundamental Filters for Intraday Opportunities:
Fundamental filters provide long-term insights, while technical filters guide short-term timing. Professional intra-day traders use both to identify stocks with underlying solid financials and favorable technical patterns for entry and exit points.
Day Traders also Monitor positive news catalysts like earnings releases, product launches, or industry tailwinds. Filter for stocks experiencing such events to capitalize on short-term price jumps potentially.
Another thing that you can also do as a day trader is to
Consider incorporating analyst ratings from reputable firms into your filters. While not infallible, they can offer additional perspectives on a company's fundamentals and growth potential.
But remember, whatever fundamental filter you choose,
Always Prioritize Liquidity as a day trader
You must ensure that chosen stocks have sufficient Liquidity (e.g., high ADV) for smooth entry and exit during intraday trading.
Bonus Strategies to identify trading Opportunities Using a combination of Filters;
Now that you've got an understanding of using the filters on a stock screener to find opportunities during the day, here are a few more tricks you can use in your trading game:
1. The Steady Climber: Combine low Beta (e.g., < 1) with low ATR (e.g., < 0.5%) and look for stocks trading near the upper Bollinger Band. This signals a potentially low-risk entry point in a generally stable stock that might experience a gradual price increase.
- The Breakaway: Use Bollinger Band breakouts with high ATR (e.g., > 1%) and moderate Beta (e.g., 0.5-1.5). This strategy targets volatile stocks poised for significant price movements after breaching upper or lower bands. Be prepared for quick exits and manage risk carefully.
- The Mean Reversion: Filter for stocks with relatively high Beta (e.g., > 1.5) that have recently experienced large price swings. Identify instances where the price approaches a historical support/resistance level. This could indicate a potential short-term reversal trade, buying oversold or selling overbought stocks.
- The Momentum: Combine high RSI (e.g., > 70) with increasing volume and moderate Beta. This strategy aims to capitalize on strong upward momentum in stocks experiencing high buying pressure. Remember, momentum can reverse quickly, so have clear exit points in place.
- The News: Utilize news catalysts like earnings releases, product launches, or industry news alongside technical filters. For example, look for stocks with low Beta showing a spike in volume and RSI after positive news. This can offer short-term trading opportunities in undervalued stocks gaining traction.
Factors to consider when Using Stock Screeners
1. Use the screener as a starting point: The screener is not a crystal ball. It provides probabilities, not guarantees. Use it to shortlist potential opportunities. Don't rely solely on the filters. Conduct further research into each stock's specific news, company fundamentals, and technical chart patterns before making a trading decision.
2. Adjust filters dynamically: Market conditions and stock fundamentals can change quickly. Regularly update your filter settings based on real-time news, price movements, and market sentiment.
3. Backtest your strategies: Before deploying real capital, test your filter combinations and trading strategies on historical data to assess their effectiveness and refine your approach.
4. Manage risk effectively: Always use stop-loss orders to limit potential losses. Refrain from overexposing yourself to any single trade. Maintain a disciplined trading approach and avoid emotion-driven decisions.
Remember, using a stock screener effectively requires practice, skill, and a deep understanding of technical and fundamental analysis. Combine these factors with responsible risk management, especially when doing intraday trading, and maximize your chances for success.
Trade Smarter!!
