Swing Trading Stock Ideas – Screening Stocks

Swing Trading Stock Ideas

Many traders especially those who are starting out are looking for stocks to add to their swing trading stock ideas list or as I like to call it my hit list.

This list is very important because it makes up your pool of participants or opportunities, so you have to make sure you screen these stocks or ETF’s for the best possible selection.

There’s nothing worse than picking a stock X from your list and finding out after the fact that if you picked stock Y you would have gained substantially more profit per trade.

These basic blunders can easily be avoided by using good screening guidelines.

Make Sure Your Stocks Have Reasonable Volume

The first factor you want to look for is volume. Make sure your stock or ETF has an average daily volume over 200,000 shares.

While this is actually a fairly conservative figure, there is a reason why my threshold is low.

Some stocks that have volume of less than a 1,000,000 shares per day are ignored by institutional traders or mutual funds.

The less institutional sponsorship your stocks have the less correlation they will have with the rest of the market.

Some of the best swing trading stock ideas, come from trading stocks that have average daily volume of more than 200,000 and less than 1,000,000 shares.

Also, stocks that have this type of volume tend to be extra volatile because during heavy trading there is less traders to take the opposite side of each trade.

This is an additional benefit of trading stocks that have low institutional sponsorship.

Swing Trading Stock Ideas Need Volatility

This brings me to the second part that’s necessary for a stock to make it to my hit list. The stock has to have above average volatility.

I have several ways I screen stocks for volatility, some are very simple and some are very complex.

For the purpose of this short tutorial I will keep it extremely simple and once you get a comfortable you can always expand on this.

But in a nutshell you want to make sure the stock you are trading has a daily dollar range above $2.00. This means on average the stock has to swing about $2.00 or more per day.

Some stocks go through periods when they are volatile and when they are calm, what you want to do is only look at the last 10 trading days or two trading weeks.

What you want to see is volatility increasing to a point where the stock is covering more than 2 bucks in trading range each day.

My suggestion is to write this down in your swing trading stock ideas notebook that you record your stocks to look at.

In addition, I would stay away for stocks priced under $20.00; they typically don’t have a wide trading range on a regular basis and tend to be less volatile overall.

So remember when adding stocks to your swing trading stock ideas list, you want to avoid stocks under $20.00.

Ignoring Correlation Is Not Smart

The biggest mistake beginners tend to make is ignoring correlation rules.

Correlation is one of the most important factors as far as risk is concerned and ignoring this one rule will increase your risk and as a result decrease your odds of being profitable.

Correlation in simple terms is how closely your stocks follow each other.

For example, if you look at two similar companies in similar industry groups they may follow each other and trade almost identically.

If you take two stocks from two different industry groups like shoe manufacturing and gold or software manufacturing and oil production companies, your correlation will tend to be smaller between stocks.

All stocks have some degree of correlation to the general stock market, the more institutional sponsorship a stock has the more it will correlate to the stock market.

This is one of the reasons why I mentioned picking stocks with reasonable volume but not too much volume, these stocks will be less correlated and will give you some diversification.

The last thing you want is to have 10 stocks do exactly what the market does; you might as well just trade the index contract and save yourself commission if you want to trade this way.

Picking 10 Different Stocks In The Same Industry Group Is Not Diversification

But many traders think because they have 10 different companies, they are sufficiently diversifying.

The truth is the companies have to have sufficient degree of separation from each other to avoid having a high degree of correlation.

I tried to make this post as simple to read and understand as possible and avoided using specific terms that help identify volume,  volatility and correlation measurements using math.

There are indicators and tools to help you make these determinations mathematically as opposed to visually.

However, there is no better way to learn this material in the beginning then by actually looking at the markets and figuring it out on your own.