The Top 5 Criteria you can’t miss in your stock Scanner !

Have you ever wondered how experienced investors seem to have a sixth sense about which stocks to choose? It's not just a matter of luck or intuition but their ability to use powerful tools to make informed decisions.

The problem is that the stock market while brimming with opportunities, can also be an overwhelming sea of choices for newcomers. Sifting through these choices and identifying the opportunities underneath is complicated for a beginner, and this is precisely where the stock scanner comes in!

This powerful instrument helps you filter through the choices to find the ones that align with your goals and strategy. How do you do that? By applying the relevant filters and criteria in the stock scanner.

In this blog, we'll explore the top 5 criteria you can't afford to overlook when setting up your stock scanner. Although the choice of factors for your trading strategy may vary depending on your specific trading or investment strategy, we have tried to stick to the most basic ones to help you get started on the right footing.

1.    Price:

The price criterion in your stock scanner involves setting a range that defines the minimum and maximum stock price you are interested in. This allows you to filter out stocks that align with your budget and risk tolerance.

"ProTip: Although it is a personal choice and Individual risk tolerance levels, many traders like to focus on the range of 5$-50$ when trading in stocks."

Why it is important: The price range is critical because it tailors your stock search to match your financial capacity and risk preferences. This ensures you don't invest in stocks that are either too expensive or too speculative for your comfort level.

Let's Explain this a little!

Avoiding Stocks That Are Too Expensive:

Setting a maximum price limit for the stocks you're willing to invest in prevents you from purchasing supplies beyond your budget or financial capacity. This is similar to ensuring you buy something affordable for your finances. Investing in stocks that are too costly can put a strain on your financial resources and may not align with your investment goals. From the higher end, keep in mind that stocks above $50 might be too pricey, with too little volatility for short-term trading and they can be less capital-efficient for small accounts,

Avoiding Stocks That Are Too Speculative:

Speculative stocks are those with higher risk levels, often associated with companies in the early stages of development, have unproven business models, or operate in volatile industries. By setting criteria that filter out overly speculative stocks, you protect yourself from investing in companies with a higher likelihood of experiencing extreme price fluctuations or even financial distress. If you trade stocks, remember that many traded stocks under $5 are considered very speculative and their price action movement might be very aggressive.

Get our free PDF Guide to give yourself a headstart in your trading journey.

2.    Volume & Liquidity:

Volume is another critical factor in your stock scanner. It quantifies the number of shares traded for a specific stock within a designated time frame, like a day. It assesses a stock's liquidity and trading activity.

"Key Takeaway: Look for Stocks with a trading volume of at least a few hundred thousand a day. This range guarantees you're trading in highly liquid markets, diminishing the risks associated with price slippage and difficulties executing orders."

Why it is essential: Volume is vital because it dictates how seamlessly you can enter or exit stock positions without causing significant price fluctuations. Stocks with substantial trading volumes are usually more liquid, enabling smoother trading transactions. This liquidity facilitates smoother trading transactions for several reasons:

1. Availability of Buyers and Sellers: Stocks with high trading volumes have a more significant number of buyers and sellers actively participating in the market. When you want to sell a stock, you will likely find a willing buyer. Conversely, when you want to buy a stock, there is a better chance of finding a willing seller. This abundance of participants enhances the ease of trading.
2. Narrow Bid-Ask Spreads: The bid-ask spread is the difference between the price at which you can sell (the bid) and the price at which you can buy (the ask) a stock. This spread is typically narrow in highly liquid stocks because of numerous orders on both sides. A thin spread means you won't incur significant losses due to price differences when you execute a trade.
3. Reduced Impact Costs: Impact costs refer to the impact of a large trade on a stock's price. A substantial trade from someone in the market can significantly affect the stock's price in illiquid stocks. Liquid stocks, however, are less sensitive to the impact of large trades, which reduces costs and allows for more efficient trading.

3. Market Capitalization:

Market capitalization (market cap) is a critical element of your stock scanner, representing the total value of a company's outstanding shares in the stock market. It categorizes stocks into small-cap, mid-cap, and large-cap based on market value.

Key Takeaway: Most of the traders start trading with Stocks with market caps of $2 billion to $10 billion. This range will give them a balance between stability and growth potential.

Why it is essential: Market cap is a fundamental factor because it allows you to align your investment goals with the size of the companies you invest in. Different market cap categories offer varying risk and growth potential.

Small-cap stocks often present higher growth potential but with more risk, while large-cap stocks tend to be more stable but may offer slower growth.

 How? Let's dive in a little deeper!

 Small-Cap Stocks:

1. Higher Growth Potential: Small-cap stocks represent relatively smaller companies. These companies often have more room for growth because they are in the early stages of their development or operate in niche markets. When these companies succeed and expand, their stock prices can increase significantly, leading to higher returns for investors.
2. Greater Risk: Small-cap stocks are riskier because they are more vulnerable to economic downturns and market fluctuations. They may have limited resources and a higher dependency on a single product or market, making them more susceptible to adverse events. Additionally, small-cap stocks often need more liquidity, making buying or selling them harder without affecting their price.
3. Volatility: Small-cap stocks tend to experience more significant price swings, both up and down. While this volatility can create opportunities for substantial gains, it also poses a greater risk of significant losses.

Large-Cap Stocks:

1. Stability: Large-cap stocks represent well-established, often market-leading companies with a history of stable performance. They typically have diversified revenue streams and weather economic downturns better than smaller companies.
2. Dividends and Income: Large-cap companies often pay dividends to their shareholders, providing a steady income stream. This income can attract conservative investors, such as retirees, who prioritize stability and income over high growth.
3. Slower Growth: Because large-cap companies are already well-established and have captured a significant portion of their market, their growth potential is limited compared to smaller companies. This often translates to slower, more predictable growth rates.

4. Technical Indicators

1) Moving Averages:

Moving averages are a crucial indicator in your stock scanner. They calculate the average price of a stock over a specified period, such as 50 days or 200 days. This metric is a technical analysis tool to evaluate a stock's trend and potential price direction.

Key takeaway: There may be a trading opportunity where short-term and long-term moving averages crossover each other

Why it is essential: Moving averages are significant because they provide insights into a stock's historical price movements and trends. They can help identify potential buying or selling opportunities and gauge a stock's direction.

1. Smoothing Out Price Fluctuations: Moving averages smooth out the day-to-day price fluctuations of a stock by calculating an average price over a specific period. This smoothing effect helps to filter out short-term noise and reveals the underlying trend.
2. Identifying Trends: By plotting different moving averages on a price chart, you can quickly visualize whether a stock is in an uptrend, downtrend, or trading sideways. A simple rule of thumb is that if a shorter-term moving average (e.g., 50-day) is above a longer-term moving average (e.g., 200-day), it may indicate an uptrend. Conversely, if the shorter-term average is below the longer-term one, it may signal a downtrend.
3. Crossing Signals: The crossover of different moving averages can signal potential buying or selling opportunities. When a short-term moving average crosses above a longer-term moving average, it's often referred to as a "golden cross" and is seen as a buy signal. Conversely, when the short-term moving average crosses below the long-term moving average, it's called a "death cross" and may be considered a sell signal.

Also Read: Learn to Use Stock Screener for Day Trading in 7 Simple Steps

2) Relative Strength Index (RSI):

The Relative Strength Index, often called RSI, is a critical technical indicator in your stock scanner. It calculates the magnitude and speed of recent price changes to determine whether a stock is overbought or oversold. RSI is used to identify potential buying or selling opportunities.

Key Takeaway: As a rule of Thumb, Most of the traders, buy when RSI reaches below 30 and sell When it crosses 70.

Why it is essential: RSI is significant because it helps traders and investors gauge a stock's momentum and potential for price reversals. It signals whether a stock may be due for a correction or if its current trend is likely to continue.

·   Overbought and Oversold Conditions: RSI measures the speed and change of a stock's price movements. It is scaled from 0 to 100, with readings above 70 typically considered overbought and below 30 considered oversold.

·   Signaling a Potential Correction: When the RSI of a stock rises above 70, it suggests that the stock might be overextended and due for a correction or a pullback in its price. In other words, it indicates that the stock has experienced rapid price gains, and there's a possibility that it's become overvalued. This can be a signal for traders to consider selling or taking profits.

·   Signaling Rebound of Trend: Conversely, when the RSI falls below 30, it suggests that the stock might be oversold, meaning it has experienced a significant decline and might be undervalued. This can signal that the current trend is oversold, and a rebound or continuation may be more likely. It is an opportunity for traders to consider buying or holding their positions.

·   Divergence Signals: RSI can also provide divergence signals. For example, if the stock's price is making new highs, but the RSI is not confirming those highs (it's not creating new highs), it can be a warning sign that the current trend may weaken, and a correction or reversal could be on the horizon.

5. AfterPullbacks RCA Framework:

Trading can be uncertain and challenging, with factors beyond our control. To tackle these challenges and achieve consistent results, we rely on three critical Key Performance Indicators (KPIs) that make up the RCA Trading Framework.

Risk Management: Every trade carries a level of risk and a chance of losing money. While we can't eliminate risk, we can control it. Risk management involves two key components:

In each trade, it's essential to define specific goals and stop-loss limits. This helps create a suitable Risk-to-Reward ratio. For example, aiming for a 1:2 ratio means you're willing to risk $1 to gain $2. This approach reduces the risk of long-term losses. Although achieving the $2 gain statistically requires a more extended price movement, the Accuracy and Consistency KPI, as part of the RCA framework, can help close this statistical gap.

Consistency: Consistency is crucial in trading. It involves executing trades under consistent signals and at the same risk level. Changing your approach frequently can lead to inconsistent results and hinder your progress.

Accuracy: Accuracy is the third component of the RCA Trading Framework. It measures the success rate of your trading strategy—how well your predictions align with market performance. A strong trading strategy prioritizes precise trades, minimizes false signals, and reduces emotional decision-making.

Also Read: Psychological Pitfalls in Trading: Historical Case Studies

Final Thoughts:

In your market scanner, you have the flexibility to establish several criteria. For those beginning, it's crucial to grasp the meaning of each criterion. We've outlined the fundamental ones here to kickstart your understanding. As you progress on your trading journey, you'll encounter many criteria at your disposal. These criteria can be applied individually or combined to construct a stock screener tailored to your investment objectives and trading approach. Remember that the most suitable criteria for your requirements may vary, so it's vital to consistently evaluate and adapt your screening parameters in response to evolving market conditions and your changing strategy.

But wait, there's more! If you're eager to learn and want to get better at stock trading, we've got a free PDF book just for you. It's packed with excellent tips and tricks to help you become a stock trading superstar. Don't miss out – grab your free book and start your journey to financial success today!

Happy Trading!