A common question posed by many new and experienced traders and investors is, ‘What stocks should I trade?’ There is never a quick and easy answer because the answer will be dependent on what your goals and risk tolerance are. Traders should start to answer this question by creating a watch list.
Why Have a Stock Watch List?
Traders should have a stock watch list simply to make trading and investing much easier. There are over 5000 stocks available to invest or trade in making it impossible for a person to try and scan through manually in order to find opportunities. Instead, narrowing the focus to a smaller group of stocks makes the task more manageable. A stock watch list allows traders to focus their attention on stocks they are particularly interested in.
There are two types of watch lists that a trader should create, a general watch list and an active watch list. The general stock watch list is used to identify what stocks are in their financial universe. This general watch list should contain all the stocks that they would consider investing or trading in. If the company isn’t on a trader’s general stock watch list, it doesn’t exist in their financial world.
The second list is the active stock watch list. These stocks are exhibiting conditions and patterns that would lead a trader to soon enter a position on them. Stocks move from the general watch list to the active watch list when the stock price is nearing an entry level or a good opportunity is identified on that stock. The active stock watch list contains stocks that are about to be traded.
Most trading platforms have a stock watch list function so traders can create their own watch list and even customize the columns for the characteristics they are looking for in a stock. If a stock watch list feature is not available on brokerage’s platform, there are plenty of free ones.
Criteria for a Good Stock Watch List
Not all stocks are the same. They all have different characteristics which lead to them trading in different manners. A stock with low volume could have gaps that form on the chart intraday, not just overnight. This adds unnecessary risk for someone buying or shorting the stock.
Other stocks may be too expensive or too cheap. Expensive stocks are difficult to profit from because traders cannot buy as many shares. Small position size means small profits. Cheap stocks can also offer problems. While it is possible to afford to buy a large number of penny stocks, everyone else can afford them too. Large purchases can lead to large, unpredictable price swings.
This is where the general stock watch list comes into play. Traders can scan the entire universe of tradable stocks to narrow down their watch list to those that have enough liquidity, volume, and a decent price level. Those stocks are then added to the general watch list and should be the only stocks they focus on.
How to Scan for Stocks to Trade
Once again, this feature is usually available on brokerage trading platforms. Though every platform is slightly different, the layout is similar.
If a scanner is not available, Finviz, Yahoo Finance as well as other sites offer free stock scanners. Traders will have to determine what specific criteria they want to search for and input that information. In the Core Strategy course at Online Trading Academy, we teach our students minimum liquidity (average volume) levels to look for and also the price range (minimums and maximums) that are recommended. We encourage students to disregard penny stocks (those priced under five dollars) and those that would require a large account to buy any meaningful number of shares. The goal is to be safe while having the opportunity to realize positive results.
Trading and investing can seem difficult and cumbersome but if done correctly, it really isn’t. Narrow your stock universe by scanning and creating a stock watch list. Simplification of the process is a key element to trading and investing consistency.