October 31, 2007 at 9:58 am | | Comments 5

Deciding if a Stock is Trade-Worthy

I’ve noted before that I review many charts every night in my preparation for the following trading day, and I will probably always do so. I think there are numerous benefits to it, including keeping a streamlined watch list of trading ideas at your disposal, which greatly aid in my trading.

Since I’ve already reviewed my charting routine, I’m hoping it will help you out to explain a bit just how to go about deciding if a stock is actually “trade-worthy.” There are several things I check for as I flip through the charts, so let’s go through 5 of them and see if there’s some particular aspect of my process which can help you in yours!

Does the stock have a pattern?

I trade from the chart patterns, and the main reason why is that I know where to get into and out of trades. Every trader needs to have some kind of method for determining entries and exits, and for me this comes from the charts. Chart patterns can assist all sorts of trading methods, from short selling to playing uptrends or looking for reversals from support and resistance levels. Regardless of your method, watching the charts closely and having some familiarity with the patterns will help you often in knowing whether a particular stock should be on your trading list.

Does the stock meet your price & volume requirements?

Asking yourself these things when you run across an interesting chart will help you to quickly determine whether you’ll be able to get into or out of the stock smoothly, as well as whether there’s some potential for movement once you’re in. Illiquid stocks won’t have sufficient trading volume, showing an absence of buyers and sellers. That’s never a good thing, because your buy and sell orders need to be fulfilled by other sellers and buyers. The stock’s price can also have an impact on whether you’ll want to trade it, as some expensive stocks can carry a wide spread and move too far for your comfort. At the same time, a cheap stock may not offer up enough opportunity for price fluctuations if you take the trade.

Does the stock have earnings on the near horizon?

This is a big one every 3 months, as a slew of earnings reports begin to roll in about 2 weeks after the end of the quarter. These scheduled news releases are company-specific, and trying to trade them is a complete gamble. A good plan is to simply do your charting homework and then check the earnings calendar from a site like Yahoo Finance to be sure an entry in a stock won’t coincide with the news, particularly since they usually mean significant price gaps.

Does the stock have a history of making tradable moves?

A stock’s character, particularly in recent weeks and months, will play a major role in how (or even if) it should be traded. Watching at recent history to see if a stock tends to make good multi-day moves in a trending fashion, or if instead it typically makes quick one-day splashes followed by indecision will go a long way in helping you determine your strategy in trading it. Some stocks make habits of trending smoothly, while others gap frequently or may simply ignore indicators you rely on in your trading method, and each of these factors should be weighed before an entry is considered. Every stock has a personality, and the key to good trading lies in finding stocks whose personalities match your trading style.

Is the stock approaching key resistance or support?

Some stocks will have every important variable in place, but the only potential impediment to a lasting move could be major resistance or support (for a short sale). These levels will appear as congestion areas on the chart, and will often slow down a stock on its way higher (or lower). Anytime I see these virtual speed bumps on the horizon, I will not consider swing trading the stock but will instead just take it for a day trade to grab a quick move.

No matter which trading method you prefer or timeframe you trade on, make it a point to add some consistency to your preparation process. Having some well-defined qualifications for stocks you’re considering placing trades in will keep you disciplined and will no doubt add a layer of confidence to your approach, which will help you get back on track when you need it and stay there.

Trade well today!

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]