Chapter 4:
How to Find Stocks for Trades
“You are only as good as the stocks that you trade.
” This is a famous expression in the trading community. There are too many new traders who do not know what a good stock to day trade is nor how to find one, and they waste too many trading days mistakenly believing that the market is impossible to day trade in.
You can be the best trader in the world, but if your stocks do not move, nor have enough volume, then you cannot make money consistently. My previously mentioned friend, Mike Bellafiore, who is the co-founder of SMB Capital (a proprietary trading firm in New York City), writes in his amazing book, One Good Trade
, that trading a stock that doesn’t move is a trading day wasted. As a day trader, you must be efficient with your time and buying power (which will be explained in Chapter 5).
Now, we don’t want stocks to just move, but we seek stocks where we can identify that they are about
to move in a certain direction. It is possible that a stock that moves $5 intraday may never offer us excellent risk/reward opportunities. Some stocks move too much intraday without foreshadowing their direction.
Your next challenge as a new trader is to learn how to find proper stocks to play.
Many new traders understand how trading works and have a proper education and the right tools for day trading, but when it comes to actually finding stocks to trade in real time, they are (and I don’t want to sound mean) clueless. I certainly experienced this as a new trader myself. If you learn the strategies explained in this book, but you cannot make money consistently, it is possible that you are in the wrong stock. Again, you are only as good as the stocks you trade. You need to find the stocks that are in play by day traders or, as I call them, Stocks in Play
.
There is more than one way to select Stocks in Play and make money trading them, and there is definitely more than one correct way. Some traders trade baskets of stocks and indexes. Some day traders, like another one of my friends, Brian Pezim, author of the best-selling book, How to Swing Trade
, primarily trade Exchange-traded funds (ETFs). Many have developed proprietary filters to find stocks. Others concentrate on trading the markets as a whole with index Futures. Professional traders at the trading desks of the big banks often simply trade in a sector like Gold or Oil or Tech. But remember, we are retail traders with limited
amounts of capital, so we must be efficient with selecting our Stocks in Play.
A Stock in Play is a stock that offers excellent risk/reward setup opportunities - opportunities where your downside is 5c and your upside is 25c, or your downside is 20c and your upside is $1 – that’s 1:5. You can regularly read a Stock in Play that is about to trade higher or lower from its present price. A Stock in Play moves, and these moves are predictable, frequent, and catchable. A good intraday stock offers numerous and excellent risk/reward opportunities.
Every day, there are a new series of stocks that are in play. Trading Stocks in Play allows you to be the most efficient with your buying power. They often offer much better risk/reward opportunities intraday and allow you to execute your ideas and trading rules with more consistency. Trading the right Stocks in Play helps you to combat algorithmic programs.