How I Select Stocks for Trading
My methodology for handpicking stocks. Plus, all of my watchlists by sector.
This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.
The foundation of any trading portfolio starts with stock selection. This means something different to every style of trader.
If you’re a long-term investor or trader, for example, you are interested in researching fundamentals and competitive advantages.
Swing traders also benefit from research and understanding how a company is positioned, but through a slightly different lense.
But if you’re day trading, that same information is nearly meaningless to you. Day trading really is a completely different way thinking.
All of these trading strategies have one thing in common. They all benefit from understanding how to study and read charts.
Technical analysis is how I cut through the noise.
I would go as far as to say that after finding the right trading style for you, one that fits your lifestyle, the next big box to check is mastering stock selection.
I prefer to keep things simple so I can spend more time trading. So I’ve optimized the process and boiled it down to two basic steps.
Let’s take a look at a process for handpicking stocks that will both save you time and help put probabilities in your favor.
Accumulate Names and Sort by Sector
We are in a stock pickers market. I have no doubt about that. Finding the leaders of the pack within hot sectors is the name of the game.
To do this, you must analyze sector by sector in order to down select the leaders within their respective industries.
Welcome to step one.
This is easier to do when you have created watchlists by sector.
So how do you gather all of the names to populate these lists? Beg, borrow, steal. Whatever you have to do.
One approach, I add new stocks to my watchlists every day while reading, listening, or watching information about stocks. Over time it builds but slowly.
I have sped up the process and also found stocks in sectors I was less familiar with by talking to friends. Get your friends’ watchlists.
You can learn a lot from the people you know. Maybe some are heavy into energy while others are into financials. Ask for their watchlists and collect tickers from them.
Here’s a few of my watchlists by sector that you can steal from. Have at it!
Notice that these are fairly long lists, and I continue to add to them. Once you have a good list going, it becomes easier to maintain.
Using Charts to Select Stocks
Now that you have your lists by sector, you want to figure out who is going to lead the way. Many will guide you to reading balance sheets and income statements.
I think this is a big mistake for short term traders.
First, it takes a tremendous amount of time and energy to learn and understand how to read financial reports. Unless you are a CFA, this is not ideal.
What is not mentioned in the “Reading Financial Reports for Dummies” guides that are out there are millions of ways these numbers can be skewed.
If you do not know what to look for, and there is an endless amount of things to look for, you could read a balance sheet and think everything looks great when in fact it is not.
You can also slightly adjust numbers for earnings projections and come up with completely different scenarios for the same stock.
Everyone trades the same chart though.
There are no ways to hide price action or have a footnote disclaimer about how much volume was actually traded and what was reported was not exactly the entire picture.
The chart is the chart and when you know what to look for you can put probabilities in your favor.
So what am I looking for? It is example time!
Semiconductors
The Semiconductor industry has been hot, and many are talking about it possibly leading the S&P500 towards the next bull market.
The volatility in this sector makes it both difficult and excellent for trading.
When reviewing charts across a sector I’m looking for the chart(s) that show the following:
Holds up relatively better on drops and downtrends
Moves higher before the rest of the sector
Continuously makes new recent highs, holding higher lows
Volume spikes reflecting big buying
Based on this, which charts from the semiconductor sector stand out in this gallery?
If you said the last two, ticker symbols ON and RMBS, you are correct. Since April 2022, both have consolidated and moved higher while SWKS, MU, and AMD all drifted lower.
This is why I find sorting and analyzing charts by sector so powerful. The differences between charts in the same sector is glaring and the choice becomes much easier.
SBUX
In late October 2022 I posted a Tweet about Starbucks because it had all of the characteristics that I look for in a leader that is poised to break out.
The chart that I am looking for is one that shows signs that a low has been put in.
It also has moved higher and started to consolidate. This means the price is moving sideways, trading in a range.
While trading off of the lows and in the consolidation phase you’ll also want to see big spikes of volume. These volume spikes cannot be accomplished by retail buyers. It’s institutional money.
Why is this important?
Institutions come in with large buy orders, but they are not the complete buy order. There are still shares they need to buy to completely fill the position.
This means there will be consistent buying following the spike, helping support the stocks’ price. You can see multiple volume spikes in SBUX prior to its move higher.
The consolidation occurs in part because of the institutional buying supporting the stock price whenever it drops to the lower end of its range.
When you identify this action, you can buy the stock during the consolidation phase with higher risk. The stock has not proven it can break above the channel yet.
I prefer to wait until a strong break above the channel happens. Yes, you’ll have missed some of the upside. But you’ve managed risk which is far more important.
When you wait on this break out you also have a clear idea of when to cut your losses if needed.
You can choose to be conservative and use the prior resistance as your stop loss. For SBUX it would be $93.48.
You can give yourself a little more room by allowing for trading back in the channel. For SBUX this would have been $83.71.
These are clearly defined risk levels. Where would you cut your losses if you bought in the lower range of the channel and the shares dropped to $80? Or would it be $75?
This is an underrated part of short duration trading. Understanding how much you can lose is far more important than targeting how much you want to profit.
To recap, the characteristics I’m looking for in a chart:
A definitive move off of the lows, trading in a higher range
Consolidation with a defined range of trading
Institutional buying represented by large spikes in volume
A break above the channel with strong volume
It is likely you will find the set up with days, weeks, or even months before the trade finally breaks out. This is where you accumulate shares and in the bottom half of the range if at all possible.
Conclusion
Stock selection is critical and while there are many methods to it, you can trade successfully utilizing nothing more than charts and a sound methodology.
You can optimize the process by sorting watchlists by sector, helping quickly identify leaders and saving you time.
When you’ve identified stocks worthy of watching, identify trading ranges and be ready to pounce when the break out occurs.
Stay true to the process and trade for profits!
Twitter Spaces - Chart Reviews, Trading Strategies
Every weekend I am hosting a Twitter Space with Shaun Clarke - @ShaunClarke_ and Kaye @InvestKaye reviewing dozens of charts and talking strategies for the upcoming week.
It is a great way to sharpen your chart analyzing skills. Join us!
Link to this week’s Twitter Space: Sunday Chart Review Session
BIG NEWS! The Wealth Building Series is Booked
Keynote Speakers for the three-part Wealth Building Series have been scheduled.
Set your reminders! You won’t want to miss out on these brilliant minds sharing their knowledge around building wealth.
Saturday March 4th - Financial Freedom with @TheIndependentU
Saturday March 18th - Habits for Wealth Building with @DebtFreeGuys
Sunday March 19th - Dividend Investing with @Smartnetworth1
Whether you just want to listen and learn or even better, if you’d like to contribute to the conversation, I would love to see you there!
I hope you find this information useful each and every week.
I will continue to post ideas on Twitter for stocks I consider to be in ideal spots for buying shares or selling calls.
I will also highlight which call options you might consider selling and why.
If you have any questions, be sure to find me on Twitter @tradernatehere and send me a DM! I am always up for talking trading.
Also, be sure to follow for daily posts on trade updates and trading strategies as I pursue my goal of educating thousands on the many ways trading options can help build your account.
Have a great week of trading ahead!